Currency outlook: Strong global growth drives central bank policy convergence
by Ray Uy, Senior Portfolio Manager, Head of Macro Research and Global Multi-Sector Portfolio Management, Invesco Fixed Income, Invesco Canada
The Canadian dollar has been in a slow decline over the last year. While the Bank of Canada increased the benchmark interest rate, as expected, by 0.25% (to 0.75%) at its July meeting, oil prices appear to have peaked for the year due to increased U.S. oil production, presenting a headwind for the currency.1 We are neutral on the Canadian dollar, and concerns about overleveraged Canadian consumers leave us looking for opportunities to short the currency.
Below is the latest outlook for other key world currencies, from the Invesco Fixed Income team.
U.S. dollar
Our expectation for strong global economic growth suggests that the performance of the U.S. dollar should be mixed. Strong global growth implies that non-U.S. growth should be accelerating. In our view, this means that foreign central bank policy is likely to converge toward that of the U.S. Federal Reserve, creating an environment in which the U.S. dollar underperforms currencies of countries experiencing an economic resurgence.
Euro
We believe there is room for further euro appreciation. The fundamental backdrop in the region 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 due to global growth convergence, and that European Central Bank (ECB) policy adjustments going forward are likely to be skewed toward supporting longer-term euro strength as political risks recede.
Chinese renminbi
We expect a relatively strong performance from the CNY (onshore) and CNH (offshore) currency pair in the weeks ahead with softness in the U.S. dollar expected to add support. The gradual pace of renminbi internationalization and capital account opening emphasized by President Xi in the National Financial Work Conference suggests continued capital controls for the foreseeable future. We expect the renminbi/U.S. dollar exchange rate to remain fairly stable, trading in a range of 6.80-6.99 in the second half of 2017. The direction within this range is subject to U.S. dollar strength.
Japanese yen
We expect the yen to be more influenced by non-domestic drivers in the near term. If global central banks do not tighten policy by as much as is currently anticipated, this could be a catalyst to support the yen. We expect the yen to trade against the U.S. dollar in a range of 110-115, but with yen positioning at its most underweight in a year, it may trade toward the lower end of that range in the month ahead.
British pound sterling
Our longer-term view on sterling remains optimistic, based on our expectations of how the Brexit discussions will conclude (either a soft Brexit or with the U.K. remaining in the EU). It has been interesting to see sterling strengthen quite meaningfully against the U.S. dollar this year as the probability of a hard Brexit has receded. The headwinds to our longer-term view are likely to come in the form of fractious Brexit discussions (pointing to an increased possibility of “no deal”) or the new minority government overly loosening the purse strings to ward off the threat of losing power before the year is out (causing an increased budget deficit).
Australian dollar
The Reserve Bank of Australia (RBA) held its benchmark interest rate steady at 1.50% as expected at its July meeting.2 The statement was neutral overall and acknowledged the economic weakness in the first quarter. The RBA continues to be concerned with the housing market, and that concern, combined with stubbornly low inflation, should keep it on hold with a target rate of 1.50% for the foreseeable future. We remain neutral on the Australian dollar.
With contributions from James Ong, Senior Macro Strategist, Brian Schneider, Head of North American Rates, Scott Case, Portfolio Manager, Sean Connery, Portfolio Manager, Yi Hu, Senior Credit Analyst, Ken Hu, CIO Asia Pacific and Alex Schwiersch, Portfolio Manager.
This post was originally published at Invesco Canada Blog
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