The Canadian dollar has rallied significantly this year following the Bank of Canada’s (BoC) switch to a hawkish tilt. The combination of reasonably strong growth and the expressed intent of the BoC to remove both emergency rate cuts from 2015 left the market covering shorts in the Canadian dollar. The extreme rally has left the currency susceptible to a short-term retracement, in our view.
Below is the latest outlook for other key world currencies, from the Invesco Fixed Income team.
We expect the U.S. dollar to continue to depreciate over the long term. Our constructive global growth view and outlook for global policy convergence (toward the Fed’s tighter stance) will likely weigh on the U.S. dollar against developed market currencies. However, short U.S. dollar positioning currently appears stretched. If positions are unwound, this could lead to a dollar bounce in the near term.
We remain constructive on the prospects for further euro appreciation. In addition to support from the positive European fundamental backdrop and potential ECB policy adjustments, investors are demanding additional risk premium for U.S. denominated assets, given the current uncertain U.S. political climate.
We expect the CNY/CNH currency pair to trade relatively strongly in the weeks ahead. Offshore investors’ and Chinese corporates’ willingness to be long renminbi, together with overall softness in U.S. dollar, are expected to continue to support the renminbi. The gradual pace of renminbi internationalization and capital account opening emphasized by President Xi in the National Financial Work Conference indicates continued capital controls in the foreseeable future and potential stability in the RMB/USD exchange rate. Central bank officials have said they expect the USD/CNY spot rate to trade around 6.5-6.6 by year end.1 We expect the exchange rate to trade in a range of 6.80-6.99 in the second half of 2017.
The yen benefitted from a general flight-to-quality during August. We would expect this trend to continue against the majority of other major currencies through September, particularly given the potential for a Brexit stalemate (which would be sterling negative) and the possibility of the ECB not meeting market expectations around the exit from quantitative easing (QE). The trajectory for the yen is less clear against the U.S. dollar, however, given the recent break out of the 110-115 range. We believe a move back into that range is possible.
British pound sterling
Our longer-term view on sterling remains constructive, based on current valuations and our more optimistic view of how the Brexit discussions will eventually play out (i.e. soft Brexit or U.K. remains in the European Union (EU)). In the short term, however, sterling could come under pressure as the EU27 countries play hard ball over the ongoing status of EU citizens living in the U.K., the Irish border status post-Brexit and the U.K.’s divorce settlement, before agreeing to talk about a future trade deal between the parties. Any stall in discussions would likely negatively impact sterling relative to the euro, given the currently perceived financial wellbeing of the two economies.
The Reserve Bank of Australia (RBA) held its benchmark interest rate steady at 1.50% as expected at its August meeting.2 The statement was very similar to the prior meeting and the recent strength in the Australian dollar surprisingly had no impact on the RBA’s forecasts. Continued concern with the exuberant housing market and stubbornly low inflation should keep the RBA on hold. The Australian dollar has become expensive, but our expectation for still-positive global growth leaves us neutral currently.