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Loonie strengthen as crude rallies
Volatility has been a key theme in both currency and commodity markets as the recent swings in market valuations have demonstrated. On March 11, the loonie traded near 76.0 US¢/CAD, effectively appreciating over 14% against the greenback since it bottomed less than two months ago on January 18 when it fell below 69.0 US¢/CAD. Over this same time frame, the price of WTI crude oil rallied over 35% to reach 39 USD/barrel, again showing the correlation between the loonie and energy prices.
Despite the volatility, the bank forecasts reveal a consensus that the loonie should trade at or above current valuations through 2017. RBC is on the high-end calling for 80.0 US¢/CAD and no other surveyed bank is forecasting below 75.0 US¢/CAD. It should be noted that several of the banks published their forecasts prior to the recent rally in the loonie, so it will be worth monitoring next month whether these forecasts are adjusted should the recent trend persist.
Forecasts widen as uncertainty grows
The recent valuations of the EUR and CAD currency pair resemble that of a rollercoaster, characterized by frequent peaks and troughs over the past year. The well documented volatility of commodity markets and the hard to anticipate actions of the European Central Bank (“ECB”) have undoubtedly contributed to this uncertainty. In fact, on March 10 the ECB again surprised financial markets through stimulus measures by reducing its benchmark rate across the Eurozone to zero, while committing to boost its quantitative easing program beginning in April. The future of this currency pair remains difficult to forecast, as evidenced by the wide range of forecasts by the reporting banks. The range of forecasts is between 62.5 and 75.5 EUR¢/CAD, attributable to TD and RBC on the low and high ends respectively.
Bank of Canada holds as Fed expected to hike
On March 9th, the Bank of Canada announced that it would maintain its overnight rate at 0.5%, in line with the 2016 Q1 forecasts of the reporting banks. The statement by the Bank of Canada noted that material excess capacity in the Canadian economy will continue to dampen inflation, and that overall business investment remains weak, thereby tempering any expectations of imminent rate hikes. The reporting banks do not forecast a hike through 2016, and BMO reiterates its anticipation of a further cut to the overnight rate over the next fiscal quarter, the sole surveyed bank to call for further stimulus in 2016. On the other hand, in the United States, there is a consensus of a rising Federal Funds Rate through 2016 and 2017.
2 year yields to increase, but at slower pace
Several Canadian banks lowered their expectations of the 2 year government bond yield through 2016 and 2017. Notably, CIBC revised its 2017 year end forecast to 1.2%, compared to its February forecast of 1.35%. In the United States, RBC and Scotiabank anticipate 2 year government bond yields to rise nearly three-fold through 2017 as the United States economy continues to deliver robust GDP growth.
10-year government bond yields to rise, RBC again on high end
The yield on 10-year government bond yields is expected to rebound from current levels by the end of 2016 Q1, and further increase through 2017, in both Canada and the United States. RBC continues to anticipate the steepest increases, calling for this yield to rise to 3.05% and 3.40% by 2017 year end in Canada and the U.S. respectively.
Canadian and U.S. 30-year government bond yields to rise
The forecasting banks are in consensus that long bond yields will steadily rise over the next two years, and this is consistent with previous monthly surveys. However, compared to the last monthly survey, half of the reporting banks revised downward their forecasts by 2016 year end for both Canada and U.S. For instance, TD’s recent publication indicates that global economic uncertainty and financial market uncertainty are contributing to an expectation of a lower interest rate environment than previously forecasted.
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