- A looser yuan peg and subsequent devaluation of other currencies in the emerging world took the trade-weighted USD to levels not seen in a dozen years. The dollar rally, though already extended, still has legs due to diverging monetary policies between the Fed and other major central banks. Above-potential GDP growth slated for this year and continued strength in employment have got us ever closer to a first interest-rate hike by the Fed in almost a decade.
- Interestingly, the USD's gains in August were not at the expense of the euro and the yen, both currencies benefitting from unwinding of carry trades amidst the global stock-market rout. It's unclear, however, if those low-yielding currencies can maintain the pace if financial markets stabilize. Both the Eurozone and Japan are seeing tepid growth and below-target inflation. So, expect the BoJ and ECB to continue running their printing presses at full speed over the next several quarters, something that should weigh on the euro and yen.
- The Canadian dollar remains under pressure. The outlook for oil prices prices is dull due to excess supply and weak global growth. Monetary policy is also not favourable with a widening US-Canada yield differential likely to hurt the currency. The large current account deficit and dependence on short-term capital flows to finance it, are also not encouraging. Complicating matters is the upcoming federal elections, which promise to add a dose of uncertainty. We expect USD/CAD to trade in the 1.30-1.40 range through the end of next year.
Stéfane Marion/Krishen Rangasamy
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