Richter survey of bank forecasts: Foreign exchange and interest rates

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Loonie struggles persist as crude slides

The Loonie dipped below 72.0 US¢/CAD during trading on December 17th, plunging to its lowest level in 11 years versus the Greenback. The extent of this depreciation has come as a surprise to the reporting banks,
as the most recent survey revealed that they were forecasting the Loonie to trade between 73.0 and 78.1
US¢/CAD through the remainder of 2015 and 2016. The Loonie’s correlation with crude oil prices has been historically observed. It is no surprise that the CAD continues to depreciate as crude oil prices drop.

CAD depreciates sharply relative to EUR

There has been no shortage of volatility in currencies as the CAD depreciated sharply relative to the EUR, falling 6% in the month of December alone. There is a consensus amongst the surveyed banks that the
CAD will appreciate from current levels, but the extent of this appreciation is largely uncertain with Scotiabank and TD calling for a single CAD to demand anywhere between 1.27 and 1.49 EUR through 2016 respectively.

3, 2, 1… Fed Liftoff

On December 16th, Janet Yellen announced that the Fed would be raising the Federal Funds Rate for the first time in nearly a decade, renewing confidence that the world’s largest economy has emerged from the financial crisis. Despite depressed commodity prices and a weakened energy sector, the United States economy has proved resilient in the face of global headwinds giving the Fed the confidence to raise their policy rate. The reporting banks anticipate that the Fed will continue to gradually raise rates through 2016, with Scotiabank forecasting the Federal Funds Rate to be at 1.50% by 2016 year end. In contrast, the consensus is that the Bank of Canada will wait at least until the middle of 2016 to raise its overnight lending rate. However,
CIBC’s recent commentary suggests that there may be another rate cut once weak Q4 numbers are reported
in Canada. However, CIBC has yet to formalize that forecast.

2 year Canadian and U.S. government bond yields to rise

The 2 year Canadian and U.S. government bond yields are anticipated to slowly rise through 2016 from current levels, with Scotiabank leading the pack in estimating the highest increase in yield for the respective countries surveyed.

10 year government bond yields to increase, CIBC anticipates slight retreat in yields in Q2

The yield on 10 year government bond yields are expected to increase from current levels through 2016 in both Canada and the U.S. The majority of the banks show a steady increase over the next four quarters, with CIBC forecasting a modest decline before rising again. CIBC anticipates the Fed is likely to pause to see how the economy digests initial rate hikes, and as such expects U.S. government bond yields to slightly retreat in the short term from elevated levels.

Modest increases to long bond yields from current levels

With the 30 year U.S. government bond yield rising to nearly 3.0%, the reporting banks forecast only modest increases in yields from these levels, with CIBC on the high end at 3.6% and National and TD on the low end
at 3.2%. The same holds in Canada, with the current long bond yield at 2.22%, and only RBC anticipating the yield to rise above 3.0% by 2016 year end.

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Founded in Montreal in 1926, Richter is a licensed public accounting firm that provides assurance, tax
and wealth management services, as well as financial advisory services in the areas of organizational restructuring, insolvency, business valuation, corporate finance, litigation support, internal controls and risk management, and forensic accounting. 

Our commitment to excellence, our in-depth understanding of financial issues and our practical problem-solving methods have positioned us as one of the most important independent accounting, organizational advisory
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