Invesco Canada blog

Insights, commentary and investing expertise

Ray Uy | April 9, 2018

Currency outlook: Deflationary risks dissipate across global economies

The Invesco Fixed Income team shares its views on currencies around the world.

Canadian dollar

Neutral. The Canadian dollar has been on a one-way train weaker since the beginning of February and should be nearing support levels. The weakness has been a result of less positive economic data, including employment, which had been extremely robust before the end of last year. North American Free Trade Agreement negotiations and the possible implementation of U.S. tariffs have also created uncertainty, dragging down the currency.

U.S. dollar

Underweight. We expect the U.S. dollar to continue to depreciate, driven by global growth and converging central bank policies. Strong global growth suggests a shift away from U.S. assets – this would weigh on the dollar. We continue to forecast a total of three rate hikes by the U.S. Federal Reserve (Fed) in 2018, with a risk of four if inflation accelerates. However, recent stability in inflation data is likely to prevent the Fed from taking a more hawkish stance in the near term.


Overweight. We continue to forecast further euro appreciation due to the broader U.S. dollar trend. We believe world economies are in the nascent stages of a global inflation regime shift, transitioning from a world of disinflationary risk to one more balanced. We continue to view pullbacks in the euro as consolidation within a longer-term trend higher.


Neutral. The USD/RMB exchange rate hovered around 6.3 in March, and we believe its level will continue to be driven by the depreciation of the U.S. dollar.1 Potential trade friction with the U.S. may complicate the outlook for the renminbi. If China’s trade surplus narrows, it could put downward pressure on the currency. On the other hand, if a global risk-off event caused a sharp rise in the yen or euro against the U.S. dollar, the renminbi would be likely to appreciate. An abrupt weakening in the U.S. dollar would probably cause the renminbi to settle at about 6.2. However, in the near term, we expect it to trade in its current range of 6.3 to 6.5.1

Japanese yen

Neutral. The yen has outperformed all G10 currencies year-to-date.2 Whether that trend continues is likely to hinge on developments elsewhere, such as an escalation in U.S. protectionist rhetoric or further sanctions on Russia by Western countries following the poisoning of a former Russian spy and his daughter. Domestic developments are also worth monitoring, as a long-running scandal involving the Japanese prime minister and the finance minister could escalate and result in resignations. Prime Minister Shinzo Abe and Finance Minister Taro Aso were the brains behind the “Abenomics” project, which included the successful initiative of weakening the yen and increasing inflation through significant balance sheet expansion. Should the two resign, the successor could abandon the program, which would likely be yen-supportive. Intervention by the Japanese government remains a possibility if appreciation becomes extreme.

British pound sterling

Mostly neutral, but overweight versus the euro and U.S. dollar. The sterling-U.S. dollar exchange rate was 1.2 at the start of 20173 but is now trading close to the high of 1.5 reached the night of the Brexit referendum.4 In contrast, sterling versus the euro is much weaker than levels reached back in 2015. As the Brexit situation settles down, we expect sterling to move closer to 2015 levels. Overall, an agreement on a Brexit transition deal is likely to be supportive of sterling in the near term, as it would bring about greater certainty for businesses and consumers. The longer-term trajectory for the currency, however, remains unclear. With difficult discussions lying ahead regarding the UK’s ongoing trading relationship with the European Union, sterling’s path from here is likely to be volatile.

Australian dollar

Neutral. The Reserve Bank of Australia (RBA) held interest rates constant at its March meeting. The statement was relatively unchanged as the central bank continues to expect gradual macro improvement and remains committed to a patient policy stance. Slow wage growth, weak consumer spending and low inflation remain concerns. The RBA does not expect to reach its target inflation rate until sometime in 2019. Given its commitment to patience, we believe it will remain on hold for the foreseeable future.

Indian rupee

Neutral. Recent weakness in the rupee was largely driven by equity outflows in February. This was likely the result of a new long-term capital gains tax introduced in the 2018 budget. More recent macro data, however, show a pickup in industrial production and overall growth, which is rupee-supportive. Higher crude prices and a growing current account deficit remain the main downside risks.

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1 Source: Bloomberg L.P., March 23, 2018.
2 Source: Bloomberg L.P., Trade-weighted JPY, data from Jan. 1, 2018, to March 22, 2018.
3 Source: Bloomberg L.P., Jan. 1, 2017.
4 Source: Bloomberg L.P., June 23, 2016.

Important information

The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

The performance of an investment concentrated in issuers of a certain region or country is expected to be closely tied to conditions within that region and to be more volatile than more geographically diversified investments.

The dollar value of foreign investments will be affected by changes in the exchange rates between the dollar and the currencies in which those investments are traded.