Currency outlook: Strong global growth mixed for U.S. dollar
by Ray Uy Senior Portfolio Manager, Head of Macro Research and Global Multi-Sector Portfolio Management, Fixed Income, Invesco Canada
The Canadian dollar has been in a slow decline over the last year, but has shown strength recently. As economic growth rebounded in the first quarter, the Bank of Canada (BoC) appears to be becoming concerned that excess capacity may be declining faster than they would like. While oil prices appear to have peaked for the year due to U.S. oil production, there has been little effect on the currency. We remain underweight the Canadian dollar due to the overleveraged Canadian consumer, but we are monitoring the recent hawkish BoC rhetoric closely.
U.S. dollar
Our strong global growth view indicates a mixed environment for the U.S. dollar. Downside surprises in U.S. inflation may cause the Fed to hesitate to raise rates later this year. In addition, major global central banks like the ECB have more significant moves to make in terms of normalizing their policies. Global policy normalization will likely favor currencies of countries whose central banks are scaling back their QE programs, for example the euro versus the U.S. dollar.
Euro
We remain constructive on the prospects for further euro appreciation. The European fundamental backdrop continues to be supportive of a stronger euro, in our view. In general, we believe that the U.S. dollar cycle, has reached its zenith, driven by convergence, and that European Central Bank policy adjustments going forward are likely to be skewed toward supporting longer-term euro strength as political risks recede.
Chinese renminbi
We expect the CNY and CNH currencies to trade on the stronger side of the 6.80 – 6.99 range in the weeks ahead. The direction of the U.S. dollar/renminbi exchange rate within this range will likely be subject to U.S. dollar strength, but softening in the U.S. dollar is expected to provide support . We don’t think the new “counter-cyclical” factor for the CNY fixing, introduced at the end of May, is a game changer. The new method may have increased the discretionary element in the fixing, but we believe it is borne out of the authorities’ desire for a smoother movement of the currency.
Japanese yen
The yen continues to trade in a relatively tight range of 110-115 against the U.S. dollar and we expect this range to hold in the near term.1 Non-domestic events are likely to have more influence on the yen in the next few months, with improved U.S. economic data and Fed rate hike expectations providing the most likely catalysts for a move higher in the USD/JPY exchange rate. An escalation of geopolitical events would likely limit any yen weakness, since the yen is typically viewed as a safe haven.
British pound sterling
We remain constructive on sterling over the longer term, based upon a more optimistic outlook for Brexit discussions, valuations and investor positioning. That said, the currency could struggle in the near term given uncertainty over the sustainability of the new U.K. government. Jeremy Corbyn of the Labour Party is waiting in the wings to take over should the new coalition not survive. However, investors would not likely view his appointment positively, given the spending pledges he has made during the recent election campaign. Brexit discussions could also prove to be a headwind to sterling as preliminary discussions likely prove challenging.
Australian dollar
The Reserve Bank of Australia (RBA) held its benchmark interest rate steady at 1.50% as expected at its June 6 meeting. The statement was upbeat overall but conceded that first quarter growth would be weak. The RBA continues to be concerned with the housing market and that, combined with stubbornly low inflation should keep it on hold and keep its target rate at 1.50% for the foreseeable future. We remain neutral on the Australian dollar.
With contributions from James Ong, Senior Macro Strategist, Noelle Corum, Macro Analyst, Brian Schneider, Head of North American Rates, Scott Case, Portfolio Manager, Sean Connery, Portfolio Manager, Ken Hu, CIO Asia Pacific, Yi Hu, Senior Credit Analyst and Alex Schwiersch, Portfolio Manager.
This post was originally published at Invesco Canada Blog
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