Richter survey of bank forecasts: Foreign exchange and interest rates

January 2016

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CAD continues to weaken on falling crude, surging USD

The loonie slid to below 70.0 US¢/CAD in the first few weeks of trading in 2016, as the price for WTI crude dropped from over 37 to under 30 USD/barrel. Last month’s publication revealed that the surveyed banks were not forecasting the loonie to depreciate to these levels through 2016 – nor were they forecasting such a stark slide in energy prices, which is a significant driver of its value.

The narrative from National Bank suggests that the value of the USD is excessive, having gained 20% over the last two years against its major trading partners. As traders unwind large speculative long positions, and should the Bank of Canada not further loosen its monetary policy, then National Bank believes the CAD should benefit, settling at 75.0 US¢/CAD by year’s end. This is relatively in line with the remaining surveyed banks, which anticipate a reversal in the CAD’s prolonged depreciation, calling for the currency pair to trade anywhere between 71.0 and 81.0 US¢/CAD through 2017. As observed in the forecasts, the overall consensus from the surveyed banks is that the recent drop in the CAD is expected to be temporary.

CAD depreciates sharply relative to EUR, forecasts imply bottom

The CAD continued to depreciate against the EUR over the past month, falling over 10% in relative terms from the beginning of December to settle at under 63 EUR¢ / CAD in trading on January 18th. According to BMO’s recent publication, the less aggressive than expected easing by the European Central Bank has prompted the EUR to rally. Thus, this aggressive depreciation has been a function of both the weakening of the CAD and the strengthening of the EUR.

Looking forward, the surveyed banks anticipate the CAD to trade near or above its current valuation relative to the EUR. The range of forecasts continues to be very wide, speaking to the well documented market uncertainty in the current global economic climate. On the low and high ends, CIBC and Laurentian anticipate the loonie to demand anywhere between 64.7 and 80.0 EUR¢ / CAD through 2017.

Bank of Canada steady, Fed to continue lift

On January 19th, despite concerns of economic headwinds and challenges posed by falling crude, the Bank of Canada opted to maintain its overnight rate at 0.50%, in line with all forecasts as presented by the surveyed banks in the previous December publication. The current forecasts indicate that the overnight rate should be maintained at 0.50% until at least the end of 2016.

The Fed raised their rates on December 16th last year, and has indicated that a series of hikes are to follow should the economic data continue to warrant such monetary action. As such, all of the surveyed banks are forecasting additional Fed tightening, with RBC most notably calling for the Fed’s policy rate to reach 3.50% by the end of 2017, well above the forecast of any other surveyed bank.

2 year bond yields to increase, range of forecasts wide

Despite persistent economic headwinds, the surveyed banks anticipate 2 year government bond yields in both Canada and the U.S. to rise over 2016 and 2017. The range is notably wide in Canada, as Laurentian only sees the 2 year yield in Canada to rise to 0.80% by 2017 year end, while RBC forecasts more than 3x this yield at 2.45% for the same period.

Rising 10 year bond yields, National Bank on low end

The yield on 10 year government bond yields is expected to increase from current levels through 2017 in both Canada and the U.S. The majority of the banks are calling for a steady increase over the next two years, with RBC on the high end of these forecasts. Further, a review of National Bank’s publication reveals that their U.S. economic forecasts expect a dovish U.S. Fed.

Canadian long bond yields to rise, RBC calling for highest

In Canada, the forecasting banks are in consensus that long bond yields will steadily rise over the next two years. However, in the U.S., the range of forecasts is much wider. On one end, RBC is forecasting the 30 year Treasury yield to be as high as 4.25% by 2017 year end, expecting a robust U.S. economy. In contrast, National Bank is less optimistic about the U.S. economic recovery, forecasting this yield to be 3.11% for the same period.

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