The Canadian dollar appears to have peaked for the moment as the BoC has become concerned about the impact of a stronger Canadian dollar on the economy.
Recent growth has slowed from the breakneck pace of the second quarter allowing the BoC to wait for further information on the impact of its two recent rate hikes before considering its next move. The loonie could remain soft until economic data begin to show signs of renewed strength.
We expect our global policy convergence story to continue to play out as central banks react to strong global growth. The Fed continues to tighten, but at a pace gradual enough for the markets to absorb. We do not expect inflation to force the Fed into a more aggressive stance. This backdrop means that foreign central banks will likely remain the main driver of the U.S. dollar going forward, in our view. As global central banks remove stimulus, we expect the U.S. dollar to depreciate over the longer term.
We maintain our forecast for further euro appreciation. Global growth momentum is positive while inflation remains subdued, which will continue to support the weak U.S. dollar trend and higher euro valuations. We continue to view pullbacks in the euro as consolidation within a secular trend higher.
We expect the USD/RMB exchange rate to trade in a range of 6.5-6.7 in a stable U.S. dollar environment and a range of 6.80-6.99 if the U.S. dollar strengthens sharply from here. The People’s Bank of China indicated in the 19th Party Congress that currency stability remains a near-term policy priority. We, therefore, expect the spot level of the renminbi to move in tandem with the US dollar, but with lower volatility compared to other major currencies. Capital flows have become increasingly two-way, compared to previous periods of net outflows, and we expect this to continue in the near term.
The yen has been on a generally weakening trend against the U.S. dollar since early September. The move coincides with, what appears to be, a global move higher in economic data suggesting continued growth in the months ahead. Although expectations of central bank tightening have increased in many countries, the (BoJ) appears satisfied to keep policy unchanged, for now, particularly amid low inflation. We expect the yen to remain range-bound between ¥110-115 through year-end.
British pound sterling
Brexit discussions between the EU27 and the U.K. appear to have reached a stalemate. With the clock ticking down to the March 2019 departure date, U.K. officials will likely be keen to make a breakthrough soon so that talks can progress to discussing the trade relationship between the parties. We expect progress on talks to be slow and believe that that the probability of a “hard Brexit” could increase over the coming months. This would likely be detrimental to the currency.
The RBA appears to be satisfied keeping interest rates steady. There continue to be only minor changes to meeting statements, which remain somewhat cautious. Despite signs of a steadily improving labor market, inflation and wage growth remain stubbornly low. Low inflation along with a housing market that remains robust should keep the RBA on hold. Despite a recent modest correction, we believe the Australian dollar is still expensive. Our expectation for continued positive global growth keeps us neutral on the currency.
Ray Uy, Head of Macro Research and Currency Portfolio Management, James Ong, Senior Macro Strategist, Noelle Corum, Associate Portfolio Manager, Brian Schneider, Head of US Rates Portfolio Management, Scott Case, Portfolio Manager, Sean Connery, Portfolio Manager, Ken Hu, CIO Asia Pacific, Yi Hu, Senior Analyst, Alex Schwiersch, Portfolio Manager.