Updated FX Table

With the exception of the yuan, whose near-term targets have been adjusted up a bit to reflect recent
strength, we’ve left our currency forecasts unchanged from last month. We continue to expect the US dollar to strengthen in the early part of 2014 as the Fed tapers its asset purchase program en route to ending QE entirely by the end of the year. However, the end of the Fed’s currency debasement policies doesn’t mean the US dollar will soar to new heights in 2014. The FOMC’s new guidance “to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.5%” suggests the Fed’s target rate will remain glued at zero for at least another year.

The longer the euro remains at such heights, the longer it will take for the zone’s economy to recover. While 2014 will see GDP growth for the first time in three years, it won’t be stellar. Structural problems will continue to put a speed limit on the zone and fuel the threat of deflation. The European Central Bank may have no choice other than ease monetary policy further via another round of liquidity injections. The combination of Fed tapering and a more dovish ECB will be negative for the common currency and we’re, therefore, maintaining our 1.28 end-of-Q1 target for EURUSD.

A perfect storm hit the Canadian dollar last year as it depreciated 3% against the USD (2013 average versus 2012 average), the worst performance since 2009. A more dovish central bank, combined with soft commodity prices and bearish analyst reports caused sentiment to turn against the Canadian currency. During 2013, speculators held net short CAD positions for 45 consecutive weeks, the longest stretch on records going back to 1996. Our 1.10 end-of-Q1 target for USDCAD reflects the persistence of negative sentiment towards the loonie, although we anticipate the currency to stabilize later in the year as foreign investors eventually realize that Canada remains an attractive destination with its AAA-rating, growing resources sector, and strong ties to a US economy which is now on the upswing.