- The Fed finally acknowledged at its meeting in March that markets were right all along to expect a much less aggressive path of interest-rate hikes than it had been peddling for the last several years. The FOMC is concerned about downside risks to the US economy brought by global economic and financial developments and now expects to raise interest rates just twice this year. While we expect the trade-weighted greenback to trend down, one can never rule out bursts of strength on occasional stronger-than-expected data (such as March’s nonfarm payrolls and manufacturing ISM) that would raise odds of Fed rate hikes.
- The euro showed resilience despite additional stimulus from the European Central Bank. ECB President Draghi’s acknowledgement that the central bank was running out of room to cut interest rates helped the common currency. With the USD facing headwinds, we expect the euro to hold its ground against the greenback. The yen is also showing strength amidst market uncertainty which has resulted in hot money flowing back home. But the currency could come under pressure if, as we expect, the Bank of Japan decides to provide more stimulus to combat the apparent deterioration in domestic conditions and renewed threats of deflation.
- A better outlook for oil prices -- we now see WTI ending this year at $45/barrel (previous forecast $40) - and new fiscal stimulus presented by the Trudeau government lead us to raise our GDP growth forecast for Canada to 1.3% this year. The Bank of Canada is likely to also show upgrades in the upcoming Monetary Policy Report, something that will significantly reduce odds of further monetary easing by the central bank. That’s not to say the Canadian dollar only has upside. Fed rate hikes can indeed result in periodic lapses for the loonie. So, while acknowledging the potential for the loonie to strengthen, we continue to expect USD/CAD to trade in the 1.30-1.40 range for most of the year.
Stéfane Marion/Krishen Rangasamy