How high can the USD go?
While the trade-weighted USD has levelled off after hitting a 14-year high, still-favourable yields mean it has room to run. If, as we expect, U.S. growth tracks above potential for the next few quarters, the Fed will be in a position to raise interest rates faster than what markets currently anticipate. In that context, the euro has room to depreciate more, possibly testing parity with the greenback next year if political developments on the old continent get markets to once again question the viability of the Eurozone. Uncertainties brought by the formal start of Brexit-related negotiations will weigh on the British Pound but also on the common currency. The yen also looks vulnerable next year in light of the dull economic outlook in Japan. The yuan will remain under pressure as the People’s Bank of China deals with capital outflows and sinking foreign currency reserves. All told, the trade-weighted USD has the wind in its sails. We now expect the big dollar to remain stronger for a bit longer than we had initially anticipated and have accordingly adjusted our currency forecasts.
The Canadian dollar has seen better days. Already under pressure from a surging greenback and stillsoft oil prices, the loonie also has to endure the Bank of Canada’s dovish rhetoric which is causing U.S.-Canada spreads to widen. The large current account deficit is also a concern for the currency, more so considering it is being financed entirely by short term foreign capital flows which can reverse on a whim. We expect USDCAD to head towards the upper end of the 1.30-1.40 range over the next 12 months.
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