FX FORECASTS

François Dupuis, Vice-President and Chief Economist • Mathieu D’Anjou, Senior Economist • Hendrix Vachon, Senior Economist Desjardins, Economic Studies: 514-281-2336 or 1 866-866-7000, ext. 5552336 • desjardins.economics@desjardins.com • desjardins.com/economics

NOTE TO READERS: The letters k, M and B are used in texts and tables to refer to thousands, millions and billions respectively.IMPORTANT: This document is based on public information and may under no circumstances be used or construed as a commitment by Desjardins Group. While the information provided has been determined on the basis of data obtained from sources that are deemed to be reliable, Desjardins Group in no way warrants that the information is accurate or complete. The document is provided solely for information purposes and does not constitute an offer or solicitation for purchase or sale. Desjardins Group takes no responsibility for the consequences of any decision whatsoever made on the basis of the data contained herein and does not hereby undertake to provide any advice, notably in the area of investment services. The data on prices or margins are provided for information purposes and may be modified at any time, based on such factors as market conditions. The past performances and projections expressed herein are no guarantee of future performance. The opinions and forecasts contained herein are, unless otherwise indicated, those of the document’s authors and do not represent the opinions of any other person or the official position of Desjardins Group. Copyright © 2017, Desjardins Group. All rights reserved.

NAFTA Uncertainty Hurts the Loonie

ECONOMIC STUDIES | NOVEMBER 23RD, 2017

HIGHLIGHTS

f The Canadian dollar has been hovering around US$0.78 (C$1.28/US$) since the end of October. Rising oil prices to close to US$57 a barrel did not lift the loonie, as is usually the case. Interest rate spreads’ unfavourable movement wiped out the positive impact of rising oil prices. The Bank of Canada (BoC) resumed its cautious stance on monetary policy, slashing expectations of a rate hike. The BoC justified its cautious position citing significant risk factors such as the uncertain outcome of the North American Free Trade (NAFTA) renegotiations.

f On average, the U.S. dollar appreciated against the other major currencies in September and October. The thrust petered out however and the greenback has been losing ground since early November. This trajectory may seem surprising in a context where the markets have raised their expectations for monetary tightening in the United States. That said, not all interest rates have adjusted to these expectations. Shorter yields rose significantly, but longer maturities are taking their time adjusting, limiting interest rate spread improvements against other major economies.

Moreover, the greenback seems to be reacting to the minutes of the last Federal Reserve meeting which highlighted the weakness of inflation and to the news about the income tax cuts proposed by the Trump administration. A few weeks ago, investors had high hopes that tax cuts would be adopted quickly—this no longer appears to be the case.

f The European Central Bank (ECB) announced at the end of October that it will slash its securities purchases by half as of January 2018. The new pace of monthly purchases—€30B—should be maintained until September 2018. The ECB’s strategy was suddenly deemed more cautious than expected, penalizing the euro. The common currency kicked off November at about US$1.16 and is currently trading at around US$1.18. Overall, the economy in the euro zone continues to perform well, fuelling investor optimism about the coming quarters. Across the Channel, the pound was trading at about US$1.32, buoyed by the monetary tightening initiated by the Bank of England. The possibility of another interest rate hike remains uncertain in the short term.

MAIN FACTORS TO WATCH

f As is the case for longer bond yields, the greenback’s value does not seem to adequately reflect the state of the U.S. economy and the potential for monetary tightening. We are calling for a slight rise by the U.S. dollar in the short term. Over a longer horizon, the focus is likely to move to monetary policy changes in the other major economies. For example, even if a rate hike in the euro zone is not expected until 2019, investors could speculate on this rate increase several months in advance, giving the euro a leg up.

f The loonie should stay close to US$0.78 in the short term. We expect the BoC to wait until April 2018 before ordering a new rate hike. Diminishing uncertainties about NAFTA could lift the loonie, but the reverse is also possible. Economic surprises could also have a major impact on Canada’s currency as they could significantly affect monetary tightening expectations.

#1 BEST OVERALLFORECASTER - CANADA

ECONOMIC STUDIES

2NOVEMBER 2017 | FX FORECASTS

Main Exchange Rates

YEN Exchange rate and trend

Sources: Datastream and Desjardins, Economic Studies

¥/US$ (inverted scale)

70

80

90

100

110

120

1302011 2012 2013 2014 2015 2016 2017 2018

Japanese exchange rate200-day moving average

BRITISH POUND Exchange rate and trend

Sources: Datastream and Desjardins, Economic Studies

US$/£

1.15

1.25

1.35

1.45

1.55

1.65

1.75

2011 2012 2013 2014 2015 2016 2017 2018

British exchange rate200-day moving average

CANADIAN DOLLAR Exchange rate and trend

Sources: Datastream and Desjardins, Economic Studies

C$/US$ (inverted scale)

0.90

1.00

1.10

1.20

1.30

1.40

1.502011 2012 2013 2014 2015 2016 2017 2018

Canadian exchange rate200-day moving average

AUSTRALIAN DOLLAR Exchange rate and trend

Sources: Datastream and Desjardins, Economic Studies

US$/A$

0.65

0.75

0.85

0.95

1.05

1.15

2011 2012 2013 2014 2015 2016 2017 2018

Australian exchange rate200-day moving average

SWISS FRANC Exchange rate

Sources: Datastream and Desjardins, Economic Studies

Franc/US$

0.951.001.051.101.151.201.251.301.35

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

2011 2012 2013 2014 2015 2016 2017 2018

Franc/US$ (left) Franc/€ (right)

Franc/€

EURO Exchange rate and trend

Sources: Datastream and Desjardins, Economic Studies

US$/€

1.00

1.10

1.20

1.30

1.40

1.50

2011 2012 2013 2014 2015 2016 2017 2018

Euro zone exchange rate200-day moving average

3NOVEMBER 2017 | FX FORECASTS

ECONOMIC STUDIES

SPOT PRICE

Nov. 23 -1 month -3 months -6 months -1 year Higher Average Lower

AmericasArgentina – peso 17.4525 0.74 1.52 8.84 12.56 17.8025 16.3583 15.1785Brazil – real 3.2462 1.07 2.85 -0.42 -5.01 3.4684 3.2028 3.0614Canada – (USD/CAD) 1.2726 0.64 1.29 -5.62 -5.72 1.3732 1.3047 1.2138Canada – (CAD/USD) 0.7858 -0.64 -1.27 5.96 6.07 0.8239 0.7665 0.7283Mexico – peso 18.7755 -1.31 5.95 0.85 -9.45 21.9550 19.0789 17.5037

Asia and South PacificAustralia – (AUD/USD) 0.7618 -2.41 -3.62 1.87 3.16 0.8059 0.7632 0.7177China – yuan renminbi 6.6102 -0.45 -0.73 -4.06 -4.48 6.9610 6.7932 6.4817Hong Kong – dollar 7.8109 0.13 -0.19 0.29 0.70 7.8263 7.7868 7.7543India – rupee 64.8800 -0.22 1.30 -0.02 -5.68 68.7835 65.5088 63.6350Japan – yen 111.22 -1.96 2.00 -0.51 -1.16 118.18 112.45 107.85New Zeland – (NZD/USD) 0.6883 -1.19 -4.74 -1.84 -1.87 0.7522 0.7114 0.6810South Korea – won 1,089 -3.63 -3.77 -3.11 -7.40 1,211 1,141 1,089

EuropeDenmark – krona 6.2955 -0.63 -0.06 -5.41 -10.70 7.1569 6.6789 6.1827Euro zone – (EUR/USD) 1.1787 0.36 -0.24 4.96 11.91 1.2026 1.1160 1.0378Norway – kroner 8.1535 1.90 3.63 -2.64 -5.34 8.7237 8.3000 7.7331Russia – ruble 58.7369 2.28 -0.60 4.33 -9.19 65.4112 58.7808 55.9181Sweden – krona 8.3382 1.68 3.46 -4.22 -10.15 9.4090 8.6355 7.9198Switzerland – swiss franc 0.9833 -0.26 1.91 1.20 -3.38 1.0312 0.9881 0.9460United Kingdom – (GBP/USD) 1.3284 0.74 3.82 2.34 7.13 1.3595 1.2789 1.2065

* In comparison with the U.S. dollar, unless otherwise indicated.Note: Currency table base on previous day closure.

TABLE 1Currency market: Yields

COUNTRY – CURRENCY*

VARIATION (%) LAST 52 WEEKS

Q3 Q4 Q1 Q2 Q3 Q4f Q1f Q2f Q3f Q4f

U.S. dollarCanadian dollar USD/CAD 1.3129 1.3433 1.3313 1.2965 1.2470 1.2821 1.2658 1.2658 1.2500 1.2346Euro EUR/USD 1.1238 1.0547 1.0696 1.1406 1.1822 1.1800 1.1700 1.1800 1.1900 1.2000British pound GBP/USD 1.2990 1.2357 1.2505 1.2990 1.3417 1.3200 1.3000 1.3000 1.3000 1.3000Swiss franc USD/CHF 0.9684 1.0160 1.0001 0.9586 0.9709 0.9800 0.9900 0.9800 0.9700 0.9700Yen USD/JPY 101.35 116.90 111.40 112.38 112.49 114.00 116.00 116.00 117.00 118.00Australian dollar AUD/USD 0.7664 0.7216 0.7628 0.7691 0.7834 0.7700 0.7700 0.7800 0.7900 0.8000Chinese yuan USD/CNY 6.6716 6.9450 6.8871 6.7809 6.6534 6.6500 6.7000 6.6800 6.7000 6.7200Mexican peso USD/MXN 19.38 20.73 18.72 18.13 18.25 19.00 18.60 18.30 18.50 18.75Brazilian real USD/BRL 3.2459 3.2588 3.1681 3.3079 3.1677 3.3000 3.3500 3.2500 3.3000 3.3500

Effective dollar1 90.01 95.76 94.01 90.54 88.11 89.20 89.80 89.20 88.90 88.10

Canadian dollarU.S. dollar CAD/USD 0.7617 0.7445 0.7511 0.7713 0.8020 0.7800 0.7900 0.7900 0.8000 0.8100Euro EUR/CAD 1.4754 1.4168 1.4239 1.4787 1.4741 1.5128 1.4810 1.4937 1.4875 1.4815British pound GBP/CAD 1.7055 1.6598 1.6647 1.6840 1.6730 1.6923 1.6456 1.6456 1.6250 1.6049Swiss franc CAD/CHF 0.7376 0.7564 0.7512 0.7394 0.7786 0.7644 0.7821 0.7742 0.7760 0.7857Yen CAD/JPY 77.19 87.02 83.67 86.68 90.21 88.92 91.64 91.64 93.60 95.58Australian dollar AUD/CAD 1.0062 0.9693 1.0156 0.9970 0.9768 0.9872 0.9747 0.9873 0.9875 0.9877Chinese yuan CAD/CNY 5.0816 5.1703 5.1732 5.2304 5.3357 5.1870 5.2930 5.2772 5.3600 5.4432Mexican peso CAD/MXN 14.77 15.43 14.07 13.98 14.64 14.82 14.69 14.46 14.80 15.19Brazilian real CAD/BRL 2.4723 2.4261 2.3797 2.5515 2.5404 2.5740 2.6465 2.5675 2.6400 2.7135

f: forecasts; 1 Trade-weighted against major U.S. partners (1973 = 100).Sources: Datastream, Federal Reserve Board and Desjardins, Economic Studies

TABLE 2Currency market: History and forecasts

END OF PERIOD

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