Richter survey of bank forecasts: Foreign exchange and interest rates

February 2016

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Have we bottomed out yet? Loonie regains after reaching fresh lows

The commodity rout persisted in the month of January and led into February with the price for WTI crude oil dropping to below 27 USD/barrel. This heightened the risks to energy dependent economies and investors, and drove the loonie to fresh lows as it traded below 69.0 US¢/CAD for the first time in 13 years. The loonie did regain some ground against the USD as commodity prices stabilized, and the bank forecasts are optimistic about further strengthening of the CAD.

This month’s forecasts reveal a consensus that the loonie is expected to appreciate steadily, relative to the USD through to 2017. The consensus is that the currency pair should trade between 74.9 and 80.0 US¢/CAD by the end of 2017. Notably, TD is calling for exports and tourism, the beneficiaries of the current economic climate, to support a modest pickup in the rate of Canadian economic growth and thus, temper the appreciation of the CAD.

CAD/EUR forecasts largely unchanged; uncertainty persists

The reporting banks anticipate the CAD will trade in a wide range, between 62.1 and 80.0 EUR¢/CAD, through 2017. The high end of this range is owned by Laurentian, whereas TD is less optimistic on the strength of the CAD relative to the EUR. This wide range can be attributed to notable differences in outlooks on both the price of commodities and monetary policy actions. For instance, National anticipates the European Central Bank to add stimulus to the Eurozone at the March meeting, thereby weighing on the EUR in the near term. In the meantime, National lowered its forecast on the price of WTI crude oil, therefore causing the bank to revise downward its outlook on the relative strength of the CAD.

BMO sees Bank of Canada cut, Fed to continue gradual lift

The current series of forecasts shows BMO anticipating a further cut to the Bank of Canada overnight rate. BMO believes that real GDP growth will lag the forecasts put forward by the Bank of Canada of 1.4% and 2.6% through 2016 and 2017. RBC on the other hand, anticipates a strong rebound to the Canadian economy, thereby paving the way for a series of overnight rate hikes through 2017 to 1.75%. This is well above any other forecast presented by the remaining surveyed banks. Regarding the United States, there is a consensus that the Fed will continue its gradual liftoff, with RBC once again on the high-end of forecasts.

2-year bond yields to increase, forecasts revised downward

The yield on the 2-year Canadian government bond slid to 0.35% as worries about economic growth grew. The banks maintained their consensus that the yield on the Canadian 2-year government bond will increase, but largely revised down their expectations. For instance, National forecasts the yield at 0.66% by the end of 2016, versus 0.98% in last month’s forecast. The general consensus regarding the United States is that the 2-year bond yield will rise steadily through 2016 and 2017.

Canadian and U.S. 10-year government bond yields to rise

The yield on 10-year government bond yields is expected to increase from current levels through 2017 in both Canada and the U.S. A review of National’s publication reveals that since Canadian growth and headline inflation outlooks were revised downwards, then the same holds for interest rate projections. As such, the 10-year Canadian government bond yield forecast was revised downward from 2.03% to 1.73% by 2016 year end.

Long bond yields to rise through 2017

The reporting banks are in consensus that long bond yields will steadily rise by 2016 and 2017 year end. Relative to last month’s forecast, the range of forecasts has narrowed with respect to 30-year U.S. Treasury yields. Last month, RBC was forecasting the 30-year Treasury yield to be as high as 4.25% by 2017 year end, but has notably revised this forecast downward to 3.85%. In the meantime, National, who forecasted a 3.11% 30-year Treasury yield last month, revised upward their forecast to 3.16% for the same time frame.

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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 and consulting firms in the country. Richter has offices in both Toronto and Montreal.

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