- A December interest-rate hike isn’t fully priced-in by markets and as such there is upside potential for the USD if the FOMC delivers on its repeated warnings that rates will go up before year-end. But the greenback may struggle next year. If, as we expect, inflation remains tame and growth slows, the Fed will be forced to quickly move back to the sidelines, something that will weigh on the currency. The IMF’s recent decision to include the yuan in its Special Drawing Rights could also take some steam out of the USD.
- The European Central Bank’s decision to increase monetary stimulus in December isn’t surprising given the dull economic outlook for the zone and continuing threats of deflation. While we expect EUR/USD to be under pressure over the near term due to diverging monetary policies in the US and Europe, the common currency could stabilize or even appreciate somewhat in 2016 as the Fed takes a pause.
- This year is one to forget for holders of the Canadian dollar. The 2015 average for USD/CAD is about 1.28 (i.e. 78 US cents for a C$) or 15% weaker than last year, the worst annual loss in over four decades. After that rout, things can only get better in our view. Besides an expected Fed-induced weakening of the USD, the loonie could also benefit from commodities, which arguably have more upside than downside following this year’s collapse. The C$ could also benefit from investment inflows if foreigners manage to see through the barrage of negative news on Canada, and make the most of a rare opportunity to snap up Canadian assets at a discount. We continue to expect USD/CAD to come close to the lower end of the 1.25-1.35 trading range in 2016.
Stéfane Marion/Krishen Rangasamy
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