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CAD to rebound despite numerous headwinds
On May 8, the CAD/USD currency pair closed at 72.9 US¢/CAD; its near-lowest level of the past twelve months. Interestingly, according to Desjardins, the GDP growth in Q1 2017 was stronger than expected, indicating that the Canadian economy has been relatively robust. However, a number of factors contributed to a weakening Loonie; National cites three in particular: the dovish stance of the Bank of Canada, persistently soft oil prices dating back to 2015 and most recently, the 20% import duties slapped on Canadian lumber exports by the Trump administration.
On a month-to-month basis, the reporting banks made upward adjustments to CAD forecasts against the USD. Amongst surveyed banks, Desjardins is the most optimistic – expecting that the uptick in real Canadian Q1 GDP growth will lead to an increase in the growth forecast for the whole of 2017. National is anticipating a more hawkish tone from the Bank of Canada later this year and the need to cool down the red-hot housing market, indicating that the CAD could rebound earlier rather than later. In general, based on our observations, the reporting banks maintain the overall message that the CAD will gradually regain steam in 2018.
Decisive French election improves Euro outlook
The CAD/EUR currency pair traded at 66.8 EUR¢/CAD on May 8, 2017, a comparatively low level over the past twelve months. The Eurozone breathed a sigh of relief with the decisive victory of pro-EU candidate Emmanuel Macron over separatist-oriented Marine Le Pen on May 7. RBC’s rhetoric indicates that the reduced political uncertainty could help sustain the improvement of the Eurozone economy. Thus, it comes as no surprise that RBC made significant downward adjustments to the currency pair by 4.4 cents, implying a stronger Euro on the forecast horizon. Besides these political factors, RBC also quotes strong economic data from Europe as confirmation of a solid start to 2017. Whilst we recognize the reduced political uncertainty in Europe following Macron’s victory, we continue to observe uncertainty in the currency forecasts, which we, in part, contribute to timing. With the exception of RBC, the surveyed banks published their forecasts before the French election results surfaced. We will monitor to see whether there is continued divergence, or if the reporting banks are able to find stronger consensus in the up-coming publication given the clearer political picture.
Bank of Canada: To hike or not to hike
Compared to last month’s publication, we observe very little change in terms of the forecasts for both the Bank of Canada overnight rates and Fed rates. National is forecasting a Bank of Canada rate hike (as early as Q1 2018), the earliest amongst the reporting institutions. In National’s view, a small increase in the policy rate would help cool down rising home prices. It also cites that the neutral nominal policy rate in Canada is 3%, well above the current 0.5%. The most prominent point of uncertainty centres on the protectionism sentiments south of the border. Trump’s tax reform agenda and NAFTA renegotiation could factor into a rate hike here. As for Fed rates, BMO didn't change its forecasts, citing a Federal Open Market Committee announcement that: “the committee views the slowing in growth during the first quarter as likely to be transitory.” Further, as noted by RBC, signs of a rebound in growth will push the Committee towards another rate hike.
2 year government bond yields to rise in the forecast horizon
We observed minor adjustments made to the 2 year government bond yields for both Canada and U.S. Notably, Desjardins upwardly adjusted the Canadian bond yield forecasts throughout 2018, citing the Bank of Canada’s prediction that the Canadian economy could be running at full capacity as of the first half of 2018. As for U.S. bond yields, we note that some downward adjustments were made to the Q2 2017 forecasts. This could largely be attributed to the recent bond market rally, contributed to by the softer-than-expected U.S. economic data, according to National. Overall, the reporting banks anticipate the 2 year government bond yields to rise in both Canada and the U.S. over the forecast horizon.
Downward adjustments made to 10 year bond yields for both Canada and U.S.
During the month of April, the U.S. 10 Year Treasury yield fell as low as 2.23% (April 20), with TD commenting that bond yield retracement began with the challenges of President Trump to pass health care reform. Additionally, Desjardins downwardly adjusted U.S. bond yields by at least 10bps for the rest of the year. Canadian bond yields have been moving in sympathy with the U.S. Thus, similar discounts were made to Canadian government bond yields forecasts for the rest of 2017, although to a lesser degree. Despite the revisions, all forecasting banks continue to anticipate that 10 year yields will rise in both Canada and the U.S. over the forecast horizon.
Long bond yields forecasts revised downward
This month we observed that minor downward adjustments were made to Canadian and U.S. long bond yield forecasts by several surveyed banks. More adjustments were made to Canadian long bond yields by reporting banks, leaving a cautious message that uncertainties are looming over the Canadian economic outlook. Protectionism is one of the important factors that has contributed this downward pressure. Although reporting banks have largely adopted a “wait-and-see” approach, TD has strong faith in the U.S. economy – it believes that America is primed to re-accelerate and treasury yields will eventually rise again.