- With the end of the Fed's debasement policies, the US dollar now seems unstoppable. While rate hikes are still several months away, markets may not wait that long, more so if U.S. economic data remains strong. Rate expectations should move higher over the coming months, helping maintain the greenback's momentum, more so with both the euro and the yen under pressure from central bank policies.
- The European Central Bank's liquidity injections via purchases of covered bond and asset-backed securities have proven to be too little too late. Monetary policy transmission channels remain blocked as evidenced by still-contracting credit which is putting a damper on investment and consumption spending, and contributing to the stagnation of the eurozone economy. With deflation knocking at the door, expect the ECB to keep the money taps open for the next few years as it attempts to boost the economy and hence prices. We have made room for further depreciation, expecting EUR/USD to drop to 1.15 by the end of next year.
- Abenomics switched gears in October with the Bank of Japan deciding to increase its asset purchases to the amount of 80 trillion yen per year, i.e. up by 10 trillion/year. Japan's public pension reserve fund also announced that it will increase its allocation of foreign stocks and bonds. Those measures should maintain pressure on the yen to depreciate, and we have accordingly pushed our end-of-2015 USD/JPY forecast to 120.
- In light of persistently dovish signals from the central bank, we have pushed to the last quarter of 2015 the timing for when the Bank of Canada will resume rate hikes. The Canadian dollar will therefore be under pressure, more so with the Fed starting to normalize monetary policy next year. We now expect USD/CAD to reach as high as 1.17 in 2015, i.e. a loonie worth close to 85 cents U.S. Stéfane Marion/Krishen Rangasamy
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