Richter survey of bank forecasts: Foreign exchange and interest rates

March 2017

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CAD loses ground against USD as crude oil prices fall and Fed hike probabilities increase

On March 8th, 2017 the CAD/USD closed at 74.2 US¢/CAD, hitting the lowest level since the beginning of 2017. The weakened Canadian dollar is largely attributed to slumping oil prices and an increasing probability in a March Fed rate hike. As National reports, OPEC’s attempt to curb their oil production has created a supply glut, as more oil producers took advantage of OPEC cuts by ramping up their own output. Further to that, strong economic data and a speech made by Fed Chair Yellen on March 3rd sent a convincing signal that a Fed rate hike is happening this month in the U.S.

Many of the reporting banks made little changes to their forecasts. According to CIBC, possible changes to fiscal policies in the U.S. creates exchange rate uncertainty. Desjardins also adopts a wait-and-see approach, citing “waiting for Trump administration’s decisions” as reasoning for leaving currency forecasts unchanged. The overall trend of the surveyed banks is that the Loonie will depreciate against the Greenback for the rest of 2017, and gradually regain its ground thereafter. 

Economic momentum remains steady despite political risk

At the time of writing, the CAD/EUR currency pair traded at 70.3 EUR¢/CAD – a new low since February. The reporting banks didn’t make major changes toward their forecasts. Despite the uncertainty surrounding the upcoming elections in the Netherlands, France and Germany, many banks cite recent economic data as a cause for optimism. According to RBC, the Eurozone Composite PMI is now at the highest level in nearly six years. Scotiabank also noted that strengthening business activity and recovering inflation expectations are cause for an optimistic outlook. However, National cautions, mentioning Brexit-related negotiations and Greece’s sovereign debt problems. Overall the CAD/EUR forecasts continue to remain disperse. 

Fed March rate hike sets stage; BoC rates unchanged

Fed Chair Yellen gave strong hints of rate hikes, saying “a further adjustment of the federal funds rate would likely be appropriate”.[1] Traders also hiked their bets after receiving strong data on employment. Of the surveyed banks, all but CIBC and BMO upwardly adjusted their Fed rate forecasts. On the other hand, Bank of Canada maintained its cautious tone, holding its benchmark overnight interest rate at 0.5 per cent, as Canada is still facing “persistent economic slack”; while National notes that the Canadian labour market has been showing resiliency with strong employment growth. Overall, reporting banks are maintaining BoC rate forecasts unchanged for March.

2 year bond yields expected to rise, upward adjustments made

The banks made several upward adjustments to the 2 year government bond yield forecasts for both the U.S. and Canada. For this, TD mentioned that U.S. inflation is likely to reach its 2% target by the end of this year. As for Canadian bonds, National believes that the 2-year yield will be higher later this year as Canadian monetary policy normalizes. In general, reporting banks expect short-term financing costs will go up in the next two years.

10 year bond yields pick up; rising yield expectations remain

On a month-to-month basis, we saw a slight drift up for both Canada and U.S. 10 year government bonds, which yielded 1.73 and 2.49 per cent respectively at the time of publication. Similarly, upward adjustments were made to the forecasts by TD and Desjardins. Desjardins highlights that US job creation was lively in January, and projected that the real U.S. GDP should increase to 2.5 per cent in 2017. However, their projections are largely dependent on Trump’s fiscal policies. The consensus amongst surveyed banks remains that there will be a rising yield environment in North America.  

Long bond yields to rise gradually, and at a faster pace

Long bond yields are similarly little-changed since last month. However, the banks raised their forecasts upwards. Notably, National comments that the pace of economic adjustment seems encouraging against last year’s oil shock and from recent strong job gains. TD warns that NAFTA renegotiation and the proposed Border Adjustment Tax in the U.S. could present serious risks to business investments and exports. In the absence of any significant events, the surveyed banks maintain their rising long bond yields anticipation. 





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