Fed can wait
- In light of the still soft global economic picture and risks to US growth and employment, we have pushed to Q4 the timing for Fed action. We have, accordingly, revised our forecasts to reflect the persistence of USD weakness over the short term, although we continue to expect the greenback to perk back up later in the year as the Fed finally delivers the rate hike it’s been warning about and which are currently not priced in by markets.
- With the Fed in pause mode, the euro can find some stability for now. But extra stimulus from the European Central Bank should cap the euro’s progress against the USD in the second half of the year. Similarly, the yen should be under pressure as the Bank of Japan opens the money taps further. But the dwindling amount of bonds available to purchase suggest QE may lose effectiveness and as such we have pared down yen depreciation over the forecast horizon.
- The Canadian dollar has momentum, buoyed by a soft USD, rising oil prices, and portfolio inflows. But as we’ve mentioned before, Canada’s dependence on short term capital flows to finance its large current account deficit leaves the loonie vulnerable to a negative turn in sentiment. So, while we adjusted our currency forecasts to reflect the improved near-term outlook for the C$, we expect the loonie to lose some steam towards year end coinciding with tighter Fed policy.
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