The trade-weighted US Dollar Index's impressive run ended with a nearly 2% decline in April, the worst monthly performance since September 2013. Weaker than expected US economic data in the first quarter of the year had markets pare back expectations of Fed rate hikes. But the US economy is stronger than what's depicted by Q1 results, the latter being impacted by temporary factors such as bad weather and port strikes. So, growth and hence rate expectations should bounce back as those factors dissipate.
EUR/USD has benefitted from the combination of weak US results and improving economic data on the old continent, gaining more than 4% in April, the best performance in four years. As we suggested last month, a move closer to 1.15 shouldn't be ruled out over the near term given that momentum could be sustained by the reversal of massive speculative net short positions on the euro. That said, we remain of the view that the euro is heading lower against USD over the longer term on the back of diverging monetary policies. Our end-of-2015 target for EUR/USD remains at 1.05.
The Canadian dollar just had its best month since 2011. Higher oil prices and a less dovish Bank of Canada gave the currency a boost in April. While the loonie could remain strong over the near term, we continue to expect it to head back towards 1.30 in the second half of the year, coinciding with the US economy returning to strong growth.
- Stéfane Marion/Krishen Rangasamy