Download exchange rate forecasts

First Quarter 2015
EXCHANGE RATE
FORECASTS
ONCE OIL’S PLUNGE ENDS, THE FOREIGN EXCHANGE
MARKET’S “DOLLAR FEVER” SHOULD BREAK BY MID-2015
U.S. dollar broad index, Jan. 1997 = 100
110
PNC Forecast
105
100
95
1.15
Dec-16
Jun-16
Dec-15
Jun-15
Dec-14
Jun-14
Dec-13
Jun-13
Dec-12
Jun-12
Dec-11
Jun-11
Dec-10
90
U.S. dollars per Australian dollar
1.10
1.05
1.00
0.95
0.90
PNC Forecast
0.85
0.80
Dec-16
Jun-16
Dec-15
Jun-15
Dec-14
Jun-14
Dec-13
Jun-13
Dec-12
0.75
Jun-12
Australian Dollar: Like most commodity currencies, the
Aussie dollar plunged to a multi-year low vis-à-vis the U.S.
dollar in the second half of 2014. The global decline in oil prices
coincided with a softer Australian economy, prompting the
Reserve Bank of Australia to leave its benchmark cash rate
unchanged at 2.5 percent as expected at its December
decision. The RBA anticipates a “period of stability in interest
rates,” i.e. no rate hikes in 2015. Australia’s unemployment
rate continues to trend higher as commodity prices weaken and
mining investment drops, and the continued slowdown in China
points to further weakness for Australian exports. The Aussie
dollar is likely to be quite weak vis-à-vis the U.S. dollar in 2015
and 2016 as the Federal Reserve normalizes U.S. monetary
policy, but in the short run, there is room for a modest
appreciation of the Aussie dollar if global oil prices find a floor
as expected.
115
Dec-11
U.S. Dollar: The dollar surged in the second half of 2014 as
the U.S.’s self-sustaining economic expansion strengthened:
faster job growth fueled broad-based real GDP growth, in turn
fueling more hiring. The Federal Open Market Committee
modified its forward guidance at its December 2014 decision to
signal an initial Federal Funds Rate hike is likely near mid-year
2015. The plunge in oil prices in the fourth quarter of 2014 also
supported a stronger dollar, since cheaper oil reduces the U.S.
oil import bill; lower oil prices are mostly neutral for U.S.
monetary policy since the Fed usually ignores short-term dips
in inflation caused by lower oil prices and targets inflation’s
trend; lower gasoline prices will slow CPI inflation in 2015, and
will also support faster real GDP growth and hiring, propelling
the U.S. job market toward full employment. The prospect of
Federal Funds rate hikes is supportive of a strong dollar, but
was likely already “priced in” to the exchange rate market by
early 2015. Looking forward, oil prices are likely to stabilize in
the first half of 2015, and since oil prices are typically inversely
correlated with the dollar, the “dollar fever” of the second half
of 2014 and first half of 2015 is likely to break by mid-2015.
The U.S. dollar will likely stabilize at a strong level vis-à-vis
most foreign currencies in 2015.
EXCHANGE RATE FORECASTS
2.6
PNC Forecast
2.4
2.2
2.0
1.8
1.20
Dec-16
Jun-16
Dec-15
Jun-15
Dec-14
Jun-14
Dec-13
Jun-13
Dec-12
Jun-12
Dec-11
1.6
C anadian dollars
per U.S. dollar
1.15
1.10
PNC Forecast
1.05
1.00
6.5
Dec-16
Jun-16
Dec-15
Jun-15
Dec-14
Jun-14
Dec-13
Jun-13
Dec-12
Jun-12
0.95
C hinese yuan per U.S. dollar
6.4
6.3
6.2
PNC Forecast
6.1
Dec-16
Jun-16
Dec-15
Jun-15
Dec-14
Jun-14
Dec-13
Jun-13
Dec-12
6.0
Jun-12
Chinese Yuan: Domestic financial reform has transformed the
outlook for China’s exchange rate. The country marked a major
step toward opening its capital account in November 2014 when
it began allowing investors based in Hong Kong and Shanghai to
trade in stocks listed in each other’s markets. The new program,
called the “Shanghai-Hong Kong Connect,” allows Hong Kong
investors to trade in just over 1 percent of the Shanghai Stock
Exchange’s tradeable market capitalization. Chinese regulators
are likely to incrementally increase the “Connect” trading quotas
in 2015. And the more open China’s capital account becomes,
the more China’s exchange rate can be expected to fluctuate like
other emerging market exchange rates. Since the yuan
weakened much less vis-à-vis the U.S. dollar than most other
emerging market currencies in 2014, it likely has room to
weaken in 2015: In a major change in our thinking, we now
expect the yuan to depreciate to 6.23 per U.S. dollar by yearend 2015 and 6.25 by year-end 2016, with more volatility
around these average levels than in years past.
Brazilian real
per U.S. dollar
Dec-11
Canadian Dollar: Lower oil prices are a mixed blessing for
Canada’s economy: As in the U.S., cheaper gasoline boosts
Canadian consumers’ discretionary incomes and supports
household spending. But with a fifth of Canada’s real GDP
growth in the most recent twelve months coming from the
mining sector, lower energy prices pose significant downside risk
to real GDP growth, which will probably pick up only marginally
to 2.5 percent in 2015 after 2.3 percent in 2014. Energy
products account for an even larger share of Canada’s goods
exports than of its GDP, explaining why the Loonie plunged in
2014 despite an improving growth outlook. With CPI inflation
close to the Bank of Canada’s 2.0 percent target, the labor
market improving, and mixed effects from the oil price drop, the
Bank of Canada will likely begin to hike interest rates around
September 2015, slightly later than the Federal Reserve.
Evidence of an approaching Bank of Canada rate hike may
prompt the Loonie to pare some of 2014’s losses by late 2015.
2.8
Dec-11
Brazilian Real: The Brazilian real’s depreciation in the fourth
quarter of 2014 is forcing the Banco Central do Brasil to keep
monetary policy tight throughout 2015. 2014’s recession had
been cooling domestic demand and slowing inflation in “sticky”
service prices by late 2014, but the sharply weaker currency is
now raising prices of imported goods; this, and long-delayed
increases in prices administratively set by the government, will
keep CPI inflation well above the central bank’s target in 2015.
Consensus forecasts expect the Banco Central do Brasil to hike
its benchmark Selic rate to 12.50 percent by year-end 2015
from 11.75 percent at year-end 2014, and only to begin easing
policy in 2016. Tight monetary policy will mean a slow recovery
from 2014’s recession in 2015 – the Brazilian real deserves to be
weak. But how weak? A healthy interest rate premium above
U.S. assets, slowing inflation, and a turn from recession to
modest economic growth should be positive for the real and help
partially reverse 2014’s sharp depreciation in 2015 and 2016.
EXCHANGE RATE FORECASTS
1.40
1.35
1.30
1.25
PNC Forecast
1.20
72
Dec-16
Jun-16
Dec-15
Jun-15
Dec-14
Jun-14
Dec-13
Jun-13
Dec-12
Jun-12
Dec-11
1.15
Indian rupees per U.S. dollar
68
64
60
PNC Forecast
56
52
48
44
135
Dec-16
Jun-16
Dec-15
Jun-15
Dec-14
Jun-14
Dec-13
Jun-13
Jun-12
Dec-12
40
Japanese yen per U.S. dollar
125
PNC Forecast
115
105
95
85
Dec-16
Jun-16
Dec-15
Jun-15
Dec-14
Jun-14
Dec-13
Jun-13
Dec-12
75
Jun-12
Japanese Yen: Japanese policymakers expanded their
quantitative easing program in November 2014 and postponed
a tax hike scheduled for October 2015 after the previous value
added tax hike in April 2014 triggered a mid-year contraction in
real GDP. The Bank of Japan will now acquire financial assets at
an ¥83 trillion yen, or $750 billion U.S. dollar, annual pace, up
from the April 2013-October 2014 annual pace of ¥51 trillion
yen or $450 billion U.S. dollars. For Japan’s domestic economy,
more aggressive monetary easing and a less contractionary
fiscal policy should boost real GDP growth to 1.2 percent in
2015, and deliver inflation of about 1.4 percent as the weaker
yen makes imported goods more expensive, an effect partially
offset by lower global oil prices. Globally, the Bank of Japan’s
highly aggressive easing program will, in combination with the
ECB’s asset purchases, acquire financial assets in 2015 faster
than the Federal Reserve did during the peak of its quantitative
easing program in 2013. The yen is likely to weaken further as
this highly expansionary program works its way through capital
markets in 2015 and 2016.
U.S. dollars per euro
Dec-11
Indian Rupee: India’s economic outlook is cheerier than that
of other emerging markets: Real GDP growth is accelerating,
and will likely reach 6.5 percent in 2015, the fastest since
2011. Cheaper oil has set CPI inflation on track to register
below the Reserve Bank of India (RBI’s) targets of 8.0 percent
in year-ago terms in January 2015 and 6.0 percent in January
2016. As inflation falls, the RBI has room to cut its benchmark
repo rate from 8.0 percent to 7.5 percent in the first half of
2015, a further boost to the Indian growth outlook. This all
looks supportive of the rupee: Lower interest rates, lower
inflation, and faster real GDP growth should boost portfolio
investment flows into India, and lower oil prices should reduce
the cost of imports and shrink the trade deficit. This abundance
of economic good news seems likely to fuel an eventual
recovery of the rupee vis-à-vis the U.S. dollar in 2015-2016.
1.45
Dec-11
Euro: In mid-2014, the Eurozone seemed on track for
moderate growth and low inflation, although chronic
unemployment, weak domestic demand, slow growth, and an
overhang of public and private debt made this outlook
vulnerable to negative shocks. Lower oil prices are arguably
just such a shock: ECB Governing Council members expect
negative CPI inflation in year-ago terms for at least part of
2015, a breach of the ECB’s mandate for CPI inflation between
zero and two percent a.k.a. “price stability.” The ECB will likely
expand its asset purchase program in early 2015 to include
purchases of government bonds, subject to conditionality
(“string attached”), causing its balance sheet to grow €500
billion euro per year in 2015 and 2016. This expansionary
monetary policy will likely cause the euro to depreciate further
in 2015, but the currency may stabilize in 2016 as oil prices
stabilize and inflation expectations rise, raising Eurozone
nominal risk-free interest rates and supporting the euro.
EXCHANGE RATE FORECASTS
1,175
PNC Forecast
1,150
1,125
1,100
1,075
1,050
1,025
15.00
14.75
14.50
14.25
14.00
13.75
13.50
13.25
13.00
12.75
12.50
12.25
12.00
11.75
1.70
Dec-16
Jun-16
Dec-15
Jun-15
Dec-14
Jun-14
Dec-13
Jun-13
Dec-12
PNC Forecast
Dec-16
Jun-16
Dec-15
Jun-15
Dec-14
Jun-14
Dec-13
Jun-13
Dec-12
Jun-12
Mexican pesos per U.S. dollar
Dec-11
1.75
Jun-12
Dec-11
1,000
U.S. dollars per
U.K. pound sterling
1.65
PNC Forecast
1.60
1.55
1.50
Dec-16
Jun-16
Dec-15
Jun-15
Dec-14
Jun-14
Dec-13
Jun-13
1.45
Dec-12
Pound Sterling: British real GDP growth moderated in 2014 as
tighter mortgage underwriting standards took some steam out
of the housing market; expectations for a first Bank of England
Bank Rate hike rolled back from late 2014 to mid-year 2015 as
growth and inflation slowed, lowering British interest rates, and
in turn fueling a sell-off of the pound against the U.S. dollar.
Momentum will likely hold the pound to around $1.55 per £ in
2015-2016; the Bank of England is likely to normalize monetary
policy at roughly the same pace as the Federal Reserve.
Political risks could exert downward pressure on the pound in
2015, though: The ruling Conservative Party has promised a
referendum on the U.K.’s membership in the European Union if
it wins the May parliamentary election. The Conservatives
trailed the Labor Party in year-end 2014 polls, but if they gain
before May, the referendum (and a highly unlikely, but
theoretically not-impossible British exit from the E.U.) may
begin to influence the economic and political outlook.
Korean won per U.S. dollar
1,200
Jun-12
Mexican Peso: The language of the Banco de Mexico (Banxico)
December 2014 monetary policy decision effectively ruled out a
interest rate hike in 2015, fueling the peso’s 6 percent
depreciation against the U.S. dollar in the month; falling oil
prices added momentum to the peso’s depreciation. The
Mexican growth outlook is decent, although the energy industry
will likely stagnate in 2015 since government auctions of
shallow water oil field concessions only begin in July, meaning
investment will probably not begin until 2016 and production
2016-2017. But if oil does little for Mexican growth in 2015, it
will be nothing new – the industry has been a laggard for a
decade. Strong manufacturing and construction growth, by
contrast, should propel Mexican real GDP growth to around 3.5
percent in 2015, up from 2.1 percent in 2014. Banxico’s dovish
guidance justifies a weaker peso, but accelerating real GDP
growth and the prospect of stabilizing oil prices suggest that
the peso, like other commodity currencies, could retrace some
of 2014’s depreciation in 2015-2016.
1,225
Dec-11
Korean Won: The Bank of Korea (BoK) is preparing for
volatility in 2015 as U.S. interest rates rise: Its annual
Monetary Policy Direction report emphasized that the BoK
stands ready to intervene in capital markets if necessary to
manage risks of exchange rate volatility or sudden capital
outflows in 2015. A long memory of the 1998 Asian financial
crisis leaves Korean policymakers feeling anxious in the current
environment, but Korea’s fundamentals are much better today
than in the 1990s: Korea’s capital account runs a surplus,
economic growth is steady, and inflation low. Nevertheless,
anxiety has caused the BoK to leave its benchmark Base Rate
unchanged at 2.0 percent in its December 2014 decision,
despite its own forecast that CPI inflation will undershoot its
2.5-3.5 percent target in 2015 and 2016. The won will likely
depreciate moderately in coming quarters as the premium paid
on Korean interest rates relative to U.S. rates shrinks; carrytrade investment flows from Japan or the Eurozone could
increase, though, a potential offsetting factor.
EXCHANGE RATE FORECASTS
Table and chart sources: Reserve Bank of Australia, Bank of Canada, China Foreign Exchange Trading
Center, Banco Central do Brasil, Bank of Japan, European Central Bank, Reserve Bank of India, Bank
of Korea, Bank of England, CEIC, The PNC Financial Services Group
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economists.
Disclaimer: The material presented is of a general nature and does not constitute the provision of investment or economic advice
to any person, or a recommendation to buy or sell any security or adopt any investment strategy. Opinions and forecasts
expressed herein are subject to change without notice. Relevant information was obtained from sources deemed reliable. Such
information is not guaranteed as to its accuracy. You should seek the advice of an investment professional to tailor a financial
plan to your particular needs. © 2015 The PNC Financial Services Group, Inc. All rights reserved.