Invesco Canada blog

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Ray Uy | March 6, 2017

Currency outlook: CAD overvalued and USD mixed

The Canadian dollar has appreciated against the U.S. dollar since the U.S. presidential election in November. Some of the strength has been due to the higher price of oil on the back of promised cuts by OPEC producers in late 2016. In addition, a recent string of positive employment reports in Canada has supported the currency. Bank of Canada Governor Poloz attempted to limit further appreciation by mentioning that a rate cut was still possible at its January meeting with limited success. We believe the Canadian dollar remains overvalued.

See below for the Invesco Fixed Income team’s outlook for the key world currencies.


We expect U.S. dollar performance to be mixed in the near term. While global growth indicators point to an upside surprise, we do not expect a significant hawkish shift in Fed rhetoric. Therefore, we expect financial conditions to remain somewhat benign. Inflation is also expected to be stable. Rising global growth against a backdrop of benign financial conditions and stable inflation will likely support emerging markets currencies versus the U.S. dollar (U.S. dollar weaker). U.S. dollar performance versus developed market currencies will likely be more idiosyncratic and mixed overall.


While we continue to expect further euro weakness, crowded investment positioning has been trimmed during the course of this year. The political landscape globally remains unpredictable presenting varying cross currents for markets while the Fed patiently reassesses its path.


We expect the CNY/CNH currency pair to trade in the range of 6.80-6.99 ahead of the next Fed meeting in March. Policy makers have tightened outlets for capital outflows in support of the Chinese currency. The annual foreign exchange conversion limit of US$50 thousand allowed for individuals remains unchanged, but the process has become much more restrictive. Corporates are reportedly also facing more restrictive foreign exchange conversion policies and policy makers have reportedly begun to encourage companies and banks to issue more U.S. dollar bonds offshore and remit proceeds back onshore.


The value of the yen will likely continue to be driven more by external than domestic developments in the near term. Recent communications from the Trump administration (regarding currency manipulation) could also make Japanese officials cautious about implementing policies that may be interpreted (rightly or wrongly) as trying to influence the level of the yen. The risk remains that the yen could continue to strengthen over the near term, while hard data may not confirm some of the more positive survey data that we have seen of late.


Sterling remains undervalued, in our view, but we do not see an obvious catalyst for a meaningful correction in the near term. Article 50, which outlines voluntary departure from the EU, is due to be triggered by the end of March 2017. After this point, we expect to learn a lot more about the stance that the remaining EU countries are likely to take as meaningful Brexit discussions get underway. We expect sterling volatility to increase as a result.


The continuing increase in commodities prices plus signs that inflation may have troughed has put upward pressure on the Australian dollar recently. With the RBA keeping rates steady at 1.5% and the economy appearing to be doing quite well, we do not expect the RBA to lower interest rates further in the near future.1 We remain neutral on the Australian dollar.

With contributions from James Ong, Senior Macro Strategist, Brian Schneider, Head of North American Rates,Sean Connery, Portfolio Manager, Scott Case, Portfolio Manager, Ken Hu, CIO Asia Pacific,Yi Hu, Senior Credit Analyst, Alex Schwiersch, Portfolio Manager

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1 Source: Statement by Philip Lowe, Governor Reserve Bank of Australia: Monetary Policy Decision, Feb. 7, 2017.