Richter survey of bank forecasts: Foreign exchange and interest rates

May 2016

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CAD momentum persists despite April forecasts

On May 16th, the Loonie traded at 77.6 US¢/CAD, effectively rallying in excess of 13% against the Greenback since a low of 68.5 US¢/CAD on January 20th. The strength of the CAD may be largely attributed to crude oil prices having nearly doubled over this same time frame, currently at 48 USD/barrel at publication, up from 26 USD/barrel from their own January lows.

There exists some doubt amongst some surveyed banks that the CAD’s recent rally will persist as evidenced in the 2017 forecasts. National has attributed the CAD momentum to a soft USD, rising crude oil prices and portfolio inflows, and has expressed that Canada’s dependence on short-term capital inflows to finance its large current account deficit will keep the CAD vulnerable. Desjardins has mentioned that despite the CAD’s recent jump, it could go back down once the Fed resumes its planned monetary tightening. In summary, the forecasts indicate that the Loonie is expected to trade above 75.0 US¢/CAD through 2017.

The only certainty is uncertainty with CAD/EUR forecasts

For yet another month, the CAD/EUR picture remains uncertain as evidenced by the wide range of bank forecasts that continue to lack a consensus. Despite the recent rally of the CAD relative to a basket of currencies, the CAD/EUR forecasts remain largely unchanged, with only a few minor revisions to the near-term figures.

According to Scotia, the EU will continue to face heightened uncertainty leading into the UK’s EU referendum, where the decision on the country’s future status on EU membership will be determined. This event is scheduled for June 23rd, adding a layer of uncertainty as to the future value of the EUR given the hard to determine consequences that a possible British exit from the EU could have.

Don’t expect imminent overnight rate hikes; Federal Funds Rate to rise steadily

On May 25th, the Bank of Canada will hold one of its eight annual scheduled announcements regarding the target for the overnight interest rate. The surveyed banks expect the BoC to hold the rate steady, and continue to do so until at least Q1 of 2017. National joins several other banks in anticipating a rate hike by 2017 year end, stating that their modelling of the labour market suggests that pressures and imbalances in Canada’s three most populous provinces will force the BoC to be less dovish. RBC continues to be on the high-end of the forecasts by forecasting three rate hikes by 2017 year end. In the United States, the FOMC left rates unchanged in late April, and will not revisit rates until mid-June. TD’s publication states that the Fed needs further convincing of a stable international backdrop and solid underpinnings to domestic inflation for a June rate hike. The surveyed banks appear to be in a consensus that the Fed will gradually hike through 2017.

2 year bond yields remain suppressed, expected to rise in 2017

The 2 year Canadian government bond yields continue to be tempered, currently sitting at 0.52%. The surveyed banks anticipate this yield to increase, albeit very gradually, remaining below 0.75% by 2016 year end. Over 2017, the yields are expected to increase, with all banks forecasting the 2 year government bond to yield 1.0% or greater by 2017 year end. National anticipates softer quarterly GDP growth after a hot Q1 to limit much further advances of short term yields. RBC contrasts this and anticipates the 2 year yield to go as high as 1.85% by 2017 year end. In the United States, the 2 year government bond yield sits at 0.72% and is steadily expected to rise through 2017 as rates gradually rise.

10 year bond yields anticipated to rise

In both Canada and the US, 10 year government bond yields sit at 1.31% and 1.77% respectively, but are expected to rise steadily through 2017. The forecasts of the surveyed banks remain largely unchanged over last month, with the Canadian 10 year bond anticipated to yield between 1.77% and 2.70%, and the US equivalent between 2.43% and 3.20% by 2017 year end, well above existing yields even on the low end of the estimates.

After brief recovery, Canadian long bond yield slips back below 2.0%

The Canadian long bond yield slipped back below 2.0% after briefly recovering in the month of April, with the US 30 year yield remaining largely unchanged. RBC continues to forecast on the high end for both Canada and the US, optimistically anticipating the Canadian and US long bonds to yield 3.20% and 3.75% respectively by 2017 year end. No significant revisions to the forecasts over last month have been observed with these two yields.

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