FX Watch
Group Economics Macro & Financial Markets Research
21 October 2016
Less optimistic on Canadian dollar Roy Teo Senior FX Strategist Tel: +65 6597 8616
We have become less optimistic on the Canadian dollar…
…as economic growth and inflation forecasts have been revised
roy.teo@sg.abnamro.com
lower
Bank of Canada is likely to tighten monetary policy only in 2018
New year end forecast: USD/CAD: 1.30 in 2016 and 1.27 in 2017.
Less optimistic on the Canadian dollar We have become less optimistic on the Canadian dollar (CAD) and now expect a more modest appreciation against the US dollar in 2016 and 2017. The recovery in crude oil prices (positive correlation with CAD has faded recently) since August has failed to support the CAD due to market concerns that the Bank of Canada may be more dovish as economic data were weaker than expected in recent months.
Crude oil and USD/CAD sensitivity decline recently Level
Reverse scale USD/barrel
1.4
20
1.3
40
1.2
60
1.1
80
1.0
100
0.9 Jan-13
120 Oct-13
Jul-14
USD/CAD (lhs) Source: Bloomberg
Apr-15
Jan-16
Speculators are net short CAD Number of contracts
140000 120000 100000 80000 60000 40000 20000 0 Jan-11
Oct-16
Apr-12
Jul-13
Oct-14
Jan-16
CFTC non-commercial long CAD futures positions
WTI oil (rhs)
CFTC non-commercial short CAD futures positions Source: CFTC
Bank of Canada is likely to tighten monetary policy in 2018 Indeed, the Bank of Canada has downgraded their 2016 GDP forecast from 1.9% to 1.4% due to slower housing resale activity and exports trajectory in their recent October
Insights.abnamro.nl/en
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FX Watch – Less optimistic on CAD 21 October 2016
monetary policy review. The downward revisions to exports, including spillovers to domestic demand are likely to dampen real GDP growth by 0.6ppts by the end of 2018. Hence the economy is now projected to return to full capacity only in the middle of 2018. As a result we expect the Bank of Canada to tighten monetary policy only in early 2018 compared to late 2017 in our previous assessment. This is not materially different from what is priced in by financial markets. 2016 and 2017 year end USD/CAD forecast: 1.30 and 1.27 respectively Given our view that crude oil prices should continue their modest recovery in 2017, sentiment in the CAD should gradually improve as speculative net short positions in the CAD decline. On the other hand, our view that the Fed is likely to tighten monetary policy twice in 2017 is slightly more positive than what is priced in by financial markets. Hence we see opposing forces driving the CAD well into 2017. On balance we now expect a more stable CAD versus the USD. We have revised our 2016 and 2017 year end USD/CAD forecast to: 1.30 (from 1.27) and 1.27 (from 1.20) respectively.
Markets are more dovish on pace of Fed rate hikes %
Markets are more dovish on crude oil price outlook USD/barrel
1.25
70
1.00
65
0.75 60
0.50 55
0.25 0.00
50
Dec-16
Mar-17
Jun-17
Fed funds futures
Sep-17
Dec-17
Dec-16
ABN AMRO
Source: Bloomberg, ABN AMRO
Mar-17
Jun-17
WTI oil futures curve
Sep-17
Dec-17
ABN AMRO
Source: Bloomberg, ABN AMRO
Currency Forecasts majors Red/bold = change in forecasts
EUR/USD USD/JPY EUR/JPY GBP/USD EUR/GBP USD/CHF EUR/CHF AUD/USD NZD/USD EUR/NZD USD/CAD EUR/CAD USD/SEK EUR/SEK EUR/NOK USD/NOK EUR/DKK Source: ABN AMRO
20-Oct 1.0978 103.51 113.64 1.2297 0.8927 0.9889 1.0857 0.7692 0.7246 1.5152 1.3135 1.4420 8.8342 9.6983 8.9277 8.1323 7.4413
Q4 2016 1.10 103 113 1.25 0.88 1.00 1.10 0.74 0.70 1.57 1.30 1.43 8.55 9.40 9.25 8.41 7.46
Q1 2017 1.10 103 113 1.25 0.88 1.01 1.11 0.75 0.70 1.57 1.28 1.41 8.36 9.20 9.00 8.18 7.46
Q2 2017 1.10 105 116 1.25 0.88 1.02 1.12 0.75 0.70 1.57 1.28 1.41 8.18 9.00 9.00 8.18 7.46
Q3 2017 1.10 108 119 1.30 0.85 1.03 1.13 0.75 0.72 1.53 1.28 1.41 8.09 8.90 8.75 7.95 7.46
Q4 2017 1.10 110 121 1.33 0.83 1.04 1.14 0.75 0.75 1.47 1.27 1.40 7.82 8.60 8.50 7.73 7.46
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FX Watch – Less optimistic on CAD 21 October 2016
Find out more about Group Economics at: https://insights.abnamro.nl/en/
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