The Canadian dollar weakened significantly in April, breaking out of its one-year range. A combination of factors contributed to the weakness. Higher U.S. oil production and lower oil prices have put pressure on the Canadian currency. The announcement of U.S. tariffs on Canadian softwood exports has also been a factor. Third, the recent liquidity problems of a Canadian subprime mortgage lender have played a role. Despite the recent strength in the latter half of May, we believe weakness in the Canadian dollar is likely to continue.
Below is the latest outlook for other key world currencies, from the Invesco Fixed Income team.
Our strong global growth view indicates a mixed environment for the U.S. dollar. We expect the Fed to hike interest rates two more times in 2017. However, we believe other major central banks have more significant moves to make in terms of normalizing their policies. Global policy normalization should favour currencies of countries whose central banks are scaling back their quantitative easing (QE) programs, for example the euro versus the U.S. dollar.
We continue to be constructive on the prospects for further euro appreciation. The European fundamental backdrop continues to be supportive of a stronger euro. In general, we believe that QE in Europe has approached its conclusion and that policy adjustments going forward are likely to be skewed toward supporting longer-term euro strength.
We expect the CNY and CNH currencies to trade on the weaker side of the 6.80-6.99 range in the weeks ahead. Softening in the U.S. dollar is expected to continue to support the renminbi, however, the recent tightening in financial regulation, liquidity conditions and the sell-off in the onshore bond, equity and commodity markets are likely to attract short positions in the RMB, especially the CNH. We think Chinese banks will be on the other side of the trade to support the currency if necessary, but we expect the bout to add downward pressure on the currency compared to the last few weeks and months.
The Japanese yen weakened markedly following the first round of French presidential elections in April (due to the removal of flight-to-quality hedges). With uncertainty regarding the French parliamentary elections on the horizon, the BoJ’s quiet tapering of asset purchases, the U.S. government’s vigilance around currency manipulation and lingering concerns over North Korea, there is no obvious catalyst to suggest a continuation of this recent trend. We believe the risk-reward calculus favours being overweight the yen in the near term.
British pound sterling
We continue to favour an overweight position in sterling based on valuations, positioning and a more optimistic outlook for Brexit discussions. Prime Minister Theresa May is likely to have a larger majority in the U.K. parliament after this year’s June 9 election, with many of the new parliamentarians sharing her vision for Brexit (i.e. a softer outcome). As this vision becomes clearer, sterling is likely to appreciate against its G10 counterparts. We could see some weakness in the shorter term, however, if it is perceived that EU politicians are trying to influence the outcome of the U.K. election by talking down the chances of a favourable outcome for the U.K.
The Reserve Bank of Australia (RBA) held interest rates constant at 1.50% at it last meeting.1 The bank’s statement was balanced overall. The latest inflation report improved slightly, but remained below expectations. Given the RBA’s concern regarding the housing market, lower than desired inflation and stubbornly high unemployment, we believe the RBA will likely keep its target rate at 1.50% for some time. We remain neutral on the Australian dollar.
With contributions from James Ong, Senior Macro Strategist, Noelle Corum, Macro Analyst, Brian Schneider, Head of North American Rates, Scott Case, Portfolio Manager, Sean Connery, Portfolio Manager, Ken Hu, CIO Asia Pacific, Yi Hu, Senior Credit Analyst and Alex Schwiersch, Portfolio Manager.