The USD returned to winning ways in May as improving US data made clear to investors that the Q1 GDP slump was an aberration. We continue to believe that diverging monetary policies between the Fed and the rest of the world will push the trade-weighted USD higher over the rest of the year. But as we've seen in February and April, there could be short-term volatility if there are any hints the Fed may delay rate hikes to later, e.g. if data disappoints.
EUR/USD soared to roughly 1.15 as we had expected, but then quickly crashed back to earth after a senior ECB official said QE will be front-loaded. The Greek situation didn't help the common currency either. Athens has made clear it cannot meet its debt repayment obligations, meaning that there will be either a bailout or a default, the latter opening the door for Greece to leave the Eurozone. Our end-of-2015 target of 1.05 for EUR/USD assumes no ''Grexit''.
Like most other major currencies, the Canadian dollar struggled to cope with the USD's resurgence in May. Soft economic data and weaker oil prices were largely behind the loonie's depreciation. Considering the Bank of Canada's optimistic tone on the economy, there is room for further disappointment. There are indeed downside risks to the BoC's call for above-potential growth of 2.7% on average in the second half of the year, particularly if the impact of the oil shock on the economy lasts longer than expected. Diverging monetary policies in the US and Canada should take USD/CAD even closer to 1.30 by the end of the year.
Stéfane Marion/Krishen Rangasamy