A Difficult Start to the Year for the U.S. Dollar

[Pages:3]ECONOMIC STUDIES | JANUARY 24, 2018

FX FORECASTS

A Difficult Start to the Year for the U.S. Dollar

#1 BEST OVERALL FORECASTER - CANADA

HIGHLIGHTS

ff The U.S. dollar started the year lower against most other currencies. This may seem surprising as the tax reforms passed in the United States boosted expectations for economic growth and inflation, as well as for monetary tightening. However, the optimism regarding economic growth has also increased around the world, preventing the greenback from taking advantage of this, in relative terms. Moreover, increased optimism reduces demand for safe-haven securities, which often penalizes the U.S. dollar. Lastly, the threat of a shutdown of the U.S. government, which has finally happened, did not help the greenback's situation. Even more recently, the U.S. Treasury Secretary advocated for a weak currency, fueling further depreciation.

ff The key rate increase ordered by the Bank of Canada in January gave a shot in the arm to the Canadian dollar, which once again climbed above US$0.81. The appreciation started even before the rate hike was announced, as Canada's solid economic figures had left little doubt as to the BoC's decision. Higher oil prices also shored up the loonie at the start of the year. However, it took a temporary hit due to new concerns over the future of the North American Free Trade Agreement (NAFTA).

ff The euro is currently bordering on US$1.23. The continued improvement of the euro zone economy is prompting some to bet on a change of stance at the European Central Bank (ECB). In December, the bank revised its growth forecast upward, but it remains rather pessimistic regarding inflation. That being said, the minutes of the last ECB monetary policy meeting showed an interest among the leaders to adjust the official statement to reflect the economic improvements in the euro zone.

ff The pound and other European currencies also increased in value. Other central banks in the region are approaching monetary tightening. The Bank of England already began tightening its monetary policy last November. Despite the uncertainty caused by Brexit, the British economy did not stumble, and inflation remains above the target.

ff The trend is for an increase in the value of the currencies of emerging countries that are taking advantage of the prevailing optimism. The peso stands out with an increase of nearly 5% since the beginning of the year. The uncertainty surrounding NAFTA had less of an impact on the peso in January.

MAIN FACTORS TO WATCH

ff 2018 may generally prove to be difficult for the U.S. currency, which no longer appears to be as attractive, in relative terms.

ff The Canadian dollar should remain close to US$0.80 in the short term, but is expected to appreciate slightly in the longer term. The effects of the next expected rate hikes in Canada should be limited by a similar change in interest rates in the United States and by a slight drop in oil prices. Less uncertainty about NAFTA could help the loonie, but the opposite is also possible. The future of this agreement may be clearer in the spring.

ff The euro risks being vulnerable to changes to the content of the press releases joining the ECB's monetary policy decisions. The improvement in the economy no longer justifies keeping any mention of a possible increase in the buying of securities. The ECB could also further clarify when it will begin raising its key interest rate.

Fran?ois Dupuis, Vice-President and Chief Economist ? Mathieu D'Anjou, Senior Economist ? Hendrix Vachon, Senior Economist Desjardins, Economic Studies: 5142812336 or 1 8668667000, ext. 5552336 ? desjardins.economics@ ? economics

NOTE TO READERS: The letters k, M and B are used in texts and tables to refer to thousands, millions and billions respectively. IMPORTANT: This document is based on public information and may under no circumstances be used or construed as a commitment by Desjardins Group. While the information provided has been determined on the basis of data obtained from sources that are deemed to be reliable, Desjardins Group in no way warrants that the information is accurate or complete. The document is provided solely for information purposes and does not constitute an offer or solicitation for purchase or sale. Desjardins Group takes no responsibility for the consequences of any decision whatsoever made on the basis of the data contained herein and does not hereby undertake to provide any advice, notably in the area of investment services. The data on prices or margins are provided for information purposes and may be modified at any time, based on such factors as market conditions. The past performances and projections expressed herein are no guarantee of future performance. The opinions and forecasts contained herein are, unless otherwise indicated, those of the document's authors and do not represent the opinions of any other person or the official position of Desjardins Group. Copyright ? 2018, Desjardins Group. All rights reserved.

Main Exchange Rates

ECONOMIC STUDIES

CANADIAN DOLLAR Exchange rate and trend

C$/US$ (inverted scale) 0.90

1.00

1.10

1.20

1.30

1.40

1.50 2012

2013

2014

2015

Sources: Datastream and Desjardins, Economic Studies

Canadian exchange rate 200-day moving average

2016

2017

2018

EURO Exchange rate and trend

US$/ 1.50

1.40

1.30

1.20

1.10

1.00 2012

2013

2014

2015

Sources: Datastream and Desjardins, Economic Studies

Euro zone exchange rate 200-day moving average

2016

2017

2018

BRITISH POUND Exchange rate and trend

US$/? 1.75

1.65

1.55

1.45

1.35

1.25

1.15 2012

2013

2014

2015

Sources: Datastream and Desjardins, Economic Studies

British exchange rate 200-day moving average

2016

2017

2018

SWISS FRANC Exchange rate

Franc/US$ 1.05 1.00 0.95 0.90 0.85 0.80 0.75 0.70

2012

2013

2014

2015

Franc/US$ (left)

2016

2017

Franc/ (right)

Sources: Datastream and Desjardins, Economic Studies

Franc/ 1.35 1.30 1.25 1.20 1.15 1.10 1.05 1.00 0.95

2018

YEN Exchange rate and trend

?/US$ (inverted scale) 70

80

90

100

110

120

130 2012

2013

2014

2015

Sources: Datastream and Desjardins, Economic Studies

Japanese exchange rate 200-day moving average

2016

2017

2018

AUSTRALIAN DOLLAR Exchange rate and trend

US$/A$ 1.15

1.05

0.95

0.85

0.75

0.65 2012

2013

2014

2015

Sources: Datastream and Desjardins, Economic Studies

Australian exchange rate 200-day moving average

2016

2017

2018

JANUARY 2018 | FX FORECASTS 2

ECONOMIC STUDIES

TABLE 1 Currency market: Yields

COUNTRY ? CURRENCY*

SPOT PRICE Jan. 24

Americas Argentina ? peso Brazil ? real Canada ? (USD/CAD) Canada ? (CAD/USD) Mexico ? peso

19.3500 3.2304 1.2435 0.8042

18.7737

VARIATION (%) -1 month -3 months -6 months

7.14 -2.89 -2.52 2.59 -4.03

10.49 -0.99 -1.87 1.91 -2.44

10.84 2.62 -0.56 0.57 6.17

Asia and South Pacific Australia ? (AUD/USD) China ? yuan renminbi Hong Kong ? dollar India ? rupee Japan ? yen New Zeland ? (NZD/USD) South Korea ? won

0.8000 6.4048 7.8189 63.7600 110.31 0.7354

1,070

3.68 -2.62 0.01 -0.41 -2.62 4.71 -0.87

2.88 -3.48 0.19 -2.04 -3.16 6.55 -5.06

0.96 -5.13 0.16 -0.99 -0.72 -1.13 -3.93

Europe Denmark ? krona Euro zone ? (EUR/USD) Norway ? kroner Russia ? ruble Sweden ? krona Switzerland ? swiss franc United Kingdom ? (GBP/USD)

6.0529 1.2293 7.8233 56.3863 8.0070 0.9576 1.4018

-3.59 3.88 -6.05 -3.37 -3.84 -3.25 4.88

-4.36 4.52 -2.27 -2.15 -2.60 -3.25 6.86

-5.23 5.58 -2.29 -6.17 -2.55 1.23 7.44

* In comparison with the U.S. dollar, unless otherwise indicated. Note: Currency table base on previous day closure.

-1 year

21.23 2.02 -5.52 5.84

-12.09

5.51 -6.62 0.79 -6.42 -3.07 1.48 -8.20

-12.65 14.30 -6.33 -4.88 -9.50 -4.15 12.02

LAST 52 WEEKS Higher Average

Lower

19.3500 3.3389 1.3732 0.8239

21.4135

16.7426 3.1945 1.2935 0.7731

18.7757

15.1785 3.0614 1.2138 0.7283

17.5037

0.8059 6.9150 7.8263 68.1755 115.08 0.7522

1,166

0.7695 6.7311 7.7964 64.8399 111.93 0.7116

1,123

0.7345 6.4040 7.7566 63.3400 107.85 0.6810

1,061

7.0750 1.2293 8.6903 60.7687 9.0847 1.0146 1.4018

6.5428 1.1393 8.2359 58.1445 8.4888 0.9819 1.2975

6.0529 1.0526 7.7331 55.9181 7.9198 0.9460 1.2151

TABLE 2 Currency market: History and forecasts

2017

END OF PERIOD

Q3

Q4

Q1f

U.S. dollar Canadian dollar Euro British pound Swiss franc Yen Australian dollar Chinese yuan Mexican peso Brazilian real Effective dollar1

USD/CAD EUR/USD GBP/USD USD/CHF USD/JPY AUD/USD USD/CNY USD/MXN USD/BRL

1.2470 1.1822 1.3417 0.9709 112.49 0.7834 6.6534

18.25 3.1677

88.11

1.2579 1.2008 1.3528 0.9753 112.69 0.7802 6.5067

19.65 3.3077

87.47

1.2500 1.2300 1.3900 0.9600 111.00 0.7900 6.5000

18.75 3.2500

86.10

Canadian dollar U.S. dollar Euro British pound Swiss franc Yen Australian dollar Chinese yuan Mexican peso Brazilian real

CAD/USD EUR/CAD GBP/CAD CAD/CHF CAD/JPY AUD/CAD CAD/CNY CAD/MXN CAD/BRL

0.8020 1.4741 1.6730 0.7786

90.21 0.9768 5.3357

14.64 2.5404

0.7950 1.5105 1.7016 0.7753

89.58 0.9814 5.1726

15.62 2.6295

0.8000 1.5375 1.7375 0.7680

88.80 0.9875 5.2000

15.00 2.6000

f: forecasts; 1 Trade-weighted against major U.S. partners (1973 = 100). Sources: Datastream, Federal Reserve Board and Desjardins, Economic Studies

2018

Q2f

Q3f

1.2500 1.2300 1.4000 0.9600 113.00 0.7900 6.5000

18.75 3.3500

86.30

1.2500 1.2400 1.4100 0.9500 114.00 0.7900 6.4500

18.50 3.3000

86.00

0.8000 1.5375 1.7500 0.7680

90.40 0.9875 5.2000

15.00 2.6800

0.8000 1.5500 1.7625 0.7600

91.20 0.9875 5.1600

14.80 2.6400

Q4f

1.2346 1.2500 1.4000 0.9500 115.00 0.8000 6.4000

18.25 3.2500

85.60

0.8100 1.5432 1.7284 0.7695

93.15 0.9877 5.1840

14.78 2.6325

2019

Q1f

Q2f

Q3f

Q4f

1.2346 1.2600 1.3800 0.9500 116.00 0.8000 6.4000

18.25 3.2500

85.50

1.2195 1.2800 1.3700 0.9500 117.00 0.8100 6.3500

18.00 3.2000

84.90

1.2048 1.2900 1.3800 0.9400 118.00 0.8100 6.4000

18.25 3.2000

84.30

1.2048 1.3000 1.4000 0.9400 117.00 0.8200 6.3000

18.00 3.1000

83.80

0.8100 1.5556 1.7037 0.7695

93.96 0.9877 5.1840

14.78 2.6325

0.8200 1.5610 1.6707 0.7790

95.94 0.9878 5.2070

14.76 2.6240

0.8300 1.5542 1.6627 0.7802

97.94 0.9759 5.3120

15.15 2.6560

0.8300 1.5663 1.6867 0.7802

97.11 0.9880 5.2290

14.94 2.5730

JANUARY 2018 | FX FORECASTS 3

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