FX FORECASTS

François Dupuis, Vice-President and Chief Economist • Mathieu D’Anjou, Deputy Chief 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 © 2018, Desjardins Group. All rights reserved.

The Loonie Is Having a Hard Time Rebounding

ECONOMIC STUDIES | NOVEMBER 26, 2018

HIGHLIGHTS

f After reaching US$0.78 at the beginning of October, the Canadian dollar has been on a bit of a downswing. However, some elements suggest that the currency should be stronger than it is now. The Canadian economy is still doing well, which has prompted the Bank of Canada (BoC) to indicate that monetary tightening will continue. Moreover, the BoC is no longer talking about a gradual approach for interest rate hikes. Protectionist threats against the Canadian economy have also gone down considerably since the free trade agreement was concluded at the end of September. That said, it does not look as if the loonie will be able to increase in value against a backdrop where investors have greatly lost their appetite for risk. The recent drop in oil prices is another negative factor for the currency, and there might still be disputes over the new trade agreement with the United States and Mexico before it is officially signed.

f Investors’ aversion to risk gives an advantage to the U.S. dollar, which is now being seen as a safe-haven currency. Moreover, the Federal Reserve continues to signal further interest rate hikes.

f Recently, the euro temporarily dipped below US$1.13, the lowest it has been since summer 2017. Europe’s currency has been affected by declining economic figures and the ongoing tensions surrounding Italy’s public finances. The European Central Bank is trying to remain positive over the long term, and is still hinting at a first interest rate hike by the end of summer 2019.

f Across the Channel, the Brexit negotiations have caused the pound to swing widely. The U.K. currency temporarily went as low as US$1.27 after a new wave of dissension erupted in Theresa May’s government. It is not at all certain that the agreement between the United Kingdom and the European Union will be ratified, which could lead to a no-deal Brexit, making things far more difficult on the economic front.

f Things remained stable in emerging countries, despite the slide on the stock markets. There are even some positives, like the drop in oil prices, which could help ease inflationary pressures in some countries where a waning currency caused inflation to spike. The Chinese yuan has not depreciated significantly in recent weeks. China’s monetary authorities seem to want to give a chance to the trade negotiations with the United States.

MAIN FACTORS TO WATCH

f We continue to believe that the current pessimism on the financial markets could fade in the coming weeks. That would help the loonie gain back some of the ground it has lost since the beginning of October. The official signing of the United States–Mexico–Canada Agreement (USMCA) would also give Canada’s currency a boost. However, there is limited potential for appreciation in the coming quarters as we foresee more interest rate hikes in the United States compared to Canada. Oil could still surprise us by going up or down.

f Even though the U.S. dollar may become less of a safe-haven currency in the coming weeks, we do not expect it to lose much value. Monetary tightening in the United States should be advantageous to the greenback for some time to come. The possibility that monetary tightening will be postponed in Europe should make it harder for the euro and other European currencies to rebound.

#1 BEST OVERALLFORECASTER - CANADA

ECONOMIC STUDIES

2NOVEMBER 2018 | FX FORECASTS

Main Exchange Rates

YENExchange rate and trend

Sources: Datastream and Desjardins, Economic Studies

¥/US$ (inverted scale)

70

80

90

100

110

120

1302012 2013 2014 2015 2016 2017 2018

Japanese exchange rate200-day moving average

BRITISH POUNDExchange rate and trend

Sources: Datastream and Desjardins, Economic Studies

US$/£

1.15

1.25

1.35

1.45

1.55

1.65

1.75

2012 2013 2014 2015 2016 2017 2018

British exchange rate200-day moving average

CANADIAN DOLLARExchange 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

1.502012 2013 2014 2015 2016 2017 2018

Canadian exchange rate200-day moving average

AUSTRALIAN DOLLARExchange rate and trend

Sources: Datastream and Desjardins, Economic Studies

US$/A$

0.65

0.75

0.85

0.95

1.05

1.15

2012 2013 2014 2015 2016 2017 2018

Australian exchange rate200-day moving average

SWISS FRANCExchange 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

2012 2013 2014 2015 2016 2017 2018

Franc/US$ (left) Franc/€ (right)

Franc/€

EUROExchange rate and trend

Sources: Datastream and Desjardins, Economic Studies

US$/€

1.00

1.10

1.20

1.30

1.40

2012 2013 2014 2015 2016 2017 2018

Euro zone exchange rate200-day moving average

3NOVEMBER 2018 | FX FORECASTS

ECONOMIC STUDIES

SPOT PRICE

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

AmericasArgentina – peso 36.7300 -0.56 21.84 50.06 110.91 40.7750 26.0278 17.2350Brazil – real 3.8174 2.76 -6.26 4.58 18.04 4.1838 3.5938 3.1411Canada – (USD/CAD) 1.3232 0.95 1.47 2.72 4.03 1.3338 1.2897 1.2269Canada – (CAD/USD) 0.7557 -0.94 -1.45 -2.65 -3.88 0.8151 0.7753 0.7497Mexico – peso 20.3707 4.79 8.06 2.87 9.47 20.7489 19.1280 17.9486

Asia and South PacificAustralia – (AUD/USD) 0.7236 2.12 -0.20 -4.28 -5.09 0.8112 0.7513 0.7052China – yuan renminbi 6.9485 0.15 1.03 8.77 5.54 6.9757 6.5864 6.2690Hong Kong – dollar 7.8257 -0.16 -0.31 -0.30 0.19 7.8501 7.8364 7.8004India – rupee 70.6550 -3.94 0.78 3.34 9.42 74.3400 67.7544 63.3400Japan – yen 112.95 0.45 1.49 2.61 1.56 114.54 110.49 104.74New Zeland – (NZD/USD) 0.6781 3.51 2.18 -1.97 -1.59 0.7408 0.6928 0.6444South Korea – won 1,130 -0.62 0.80 4.62 4.15 1,144 1,097 1,055

EuropeDenmark – krona 6.5816 1.20 1.84 3.34 4.79 6.6500 6.2900 5.9502Euro zone – (EUR/USD) 1.1344 -1.00 -2.00 -3.08 -4.21 1.2503 1.1857 1.1251Norway – kroner 8.5963 3.68 2.47 6.21 5.64 8.5963 8.1098 7.6420Russia – ruble 66.2862 1.13 -2.99 7.62 13.40 70.3413 61.9078 55.7669Sweden – krona 9.0929 0.74 -0.54 3.79 9.59 9.2052 8.6315 7.8402Switzerland – swiss franc 0.9973 0.21 1.28 0.35 1.57 1.0092 0.9780 0.9238United Kingdom – (GBP/USD) 1.2805 -1.29 -0.23 -4.02 -3.70 1.4330 1.3422 1.2669

* 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 1.2470 1.2579 1.2894 1.3132 1.2906 1.2987 1.2987 1.3072 1.2987 1.2821Euro EUR/USD 1.1822 1.2008 1.2299 1.1675 1.1615 1.1500 1.1600 1.1700 1.2000 1.2200British pound GBP/USD 1.3417 1.3528 1.4028 1.3203 1.3041 1.3000 1.3000 1.3100 1.3300 1.3500Swiss franc USD/CHF 0.9676 0.9755 0.9576 0.9928 0.9768 0.9900 0.9900 0.9800 0.9800 0.9600Yen USD/JPY 112.49 112.69 106.28 110.68 113.70 113.00 114.00 115.00 115.00 114.00Australian dollar AUD/USD 0.7834 0.7802 0.7679 0.7404 0.7230 0.7300 0.7200 0.7200 0.7300 0.7400Chinese yuan USD/CNY 6.6534 6.5067 6.2753 6.6210 6.8689 6.9500 7.0000 6.9500 6.9000 6.9000Mexican peso USD/MXN 18.25 19.65 18.16 19.92 18.72 20.00 20.00 19.50 19.00 18.50Brazilian real USD/BRL 3.1677 3.3077 3.3235 3.8555 4.0036 3.7000 3.8000 3.7000 3.6000 3.5000

Effective dollar1 88.11 87.47 86.27 89.97 90.11 90.70 90.50 90.30 89.10 87.80

Canadian dollarU.S. dollar CAD/USD 0.8020 0.7950 0.7756 0.7615 0.7748 0.7700 0.7700 0.7650 0.7700 0.7800Euro EUR/CAD 1.4741 1.5105 1.5858 1.5332 1.4990 1.4935 1.5065 1.5294 1.5584 1.5641British pound GBP/CAD 1.6730 1.7016 1.8088 1.7338 1.6830 1.6883 1.6883 1.7124 1.7273 1.7308Swiss franc CAD/CHF 0.7760 0.7755 0.7427 0.7560 0.7569 0.7623 0.7623 0.7497 0.7546 0.7488Yen CAD/JPY 90.21 89.58 82.42 84.28 88.09 87.01 87.78 87.98 88.55 88.92Australian dollar AUD/CAD 0.9768 0.9814 0.9901 0.9723 0.9332 0.9481 0.9351 0.9412 0.9481 0.9487Chinese yuan CAD/CNY 5.3357 5.1726 4.8668 5.0419 5.3222 5.3515 5.3900 5.3168 5.3130 5.3820Mexican peso CAD/MXN 14.64 15.62 14.08 15.17 14.50 15.40 15.40 14.92 14.63 14.43Brazilian real CAD/BRL 2.5404 2.6295 2.5776 2.9360 3.1021 2.8490 2.9260 2.8305 2.7720 2.7300

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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