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First Quarter of 2016
EXCHANGE RATE FORECASTS
EXCHANGE RATE
FORECASTS
THE DOLLAR’S APPRECIATION WILL SLOW FURTHER IN
2016 AND 2017 ONCE OIL’S PLUNGE ENDS
U.S. Dollar: The Federal Open Market Committee raised the
federal funds target range to 0.25 to 0.50 percent at its
December 16 meeting, the first U.S. interest rate hike since
2006. In the accompanying monetary policy statement, the Fed
affirmed that it expects to make very gradual subsequent rate
hikes. PNC Economics forecasts three 25 bps funds rate hikes
per year in 2016 and 2017, as the U.S. economy expands
moderately and wage growth picks up. As in 2015, resilient
consumer spending and domestic demand should continue to
offset the drag on growth from weaker manufacturing, exports,
and energy. Near-term, the global glut of crude oil increases
downside risks to the price of oil. But the sharp drop in U.S.
energy exploration – the U.S. oil well rig count fell 65 percent
from a year earlier in December 2015 – suggests prices of oil
and other commodities are likely to stabilize in 2016 and 2017.
If so, the rout of the currencies of commodity-producing
economies should also end, slowing the dollar’s appreciation.
Australian Dollar: The Australian dollar may have reached a
bottom. The Aussie depreciated an average of more than 10
percent for three consecutive years through the end of 2015 as
investment in Australian mining peaked and then fell, Chinese
demand for Australian commodities weakened, and prices of oil,
iron ore, and coal fell. The Aussie dollar’s huge cumulative
depreciation is now boosting growth and hiring in Australia’s
non-resource sectors: Real GDP grew moderately in the third
quarter of 2015, supported by domestic demand and net
exports, and the Australian unemployment rate fell in
November 2015 to its lowest since March 2014. Following the
Aussie dollar’s depreciation to near $0.70 U.S. per Aussie
dollar, the Reserve Bank of Australia’s monetary policy
statements have become less dovish; if the moderate economic
growth of the second half of 2015 continues as expected, the
RBA will likely leave its Cash Rate on hold in 2016 at 2.0
percent. A less dovish monetary stance and the possibility of
stabilizing commodity prices by 2017 should offset the effect of
weaker Chinese growth on the Australian dollar, helping end its
long depreciation against the U.S. dollar.
130
125
120
115
U.S. dollar broad index, Jan. 1997 = 100
PNC
PNC Forecast
110
105
100
95
90
1.2
U.S. dollars per Australian dollar
1.1
1.0
0.9
0.8
0.7
0.6
PNC Forecast
EXCHANGE RATE FORECASTS
Brazilian Real: CPI inflation wildly overshot the Central Bank of
Brazil’s 2.5-6.5 percent target range in 2015: Consumer
electricity tariffs surged as fiscal pressures forced the Brazilian
government to cut spending on utility subsidies, and the sharp
depreciation of the Brazilian real passed through to higher prices
of tradable goods and energy-intensive services like
transportation. The Central Bank of Brazil has since July 2015
held its benchmark Selic rate at a highly contractionary 14.25
percent to control inflation and defend its credibility, deepening
Brazil’s economic depression. High unemployment and weak
domestic demand could ease market-driven inflationary
pressures, but political risks are high as Brazil’s public finances
erode – President Rousseff fired her fiscally-conservative Finance
Minister in December, negative for Brazil’s sovereign
creditworthiness. Risks to the Brazilian real continue to be to the
downside.
Canadian Dollar: The collapse in global oil prices weakened
Canadian output in 2015 as expected: The sharp downturn in the
capital-intensive mining industry has weakened manufacturing,
construction, and capital spending. At the same time, labor
market indicators have been resilient: With the weak Canadian
dollar pushing Canadian consumers to spend more of their
income on domestically-produced goods and services and less on
imports, and low energy prices leaving them with more
discretionary spending power after filling gas tanks, consumer
spending has offset some of the drag from energy. The Canadian
dollar’s dramatic depreciation since 2012 has been a product of
both its strong correlation with global oil prices and with reduced
expectations for Canadian interest rate hikes. If the Bank of
Canada hikes its policy rate in the second half of 2016 from its
current 0.5 percent to match it to the bottom of the federal
funds target range, and if oil prices stabilize as expected, the
Loonie may appreciate somewhat in 2016 and 2017.
Chinese Yuan: The People’s Bank of China (PBoC) allowed the
yuan to resume depreciation against the U.S. dollar after the
International Monetary Fund’s November 30 decision to add the
yuan to the IMF’s “Special Drawing Right” basket of reserve
currencies. Market forces are exerting strong pressure on the
yuan to depreciate against the U.S. dollar: Chinese economic
growth is weak, Chinese foreign trade is contracting, the PBoC
has cut interest rates six times since November 2014, U.S.
interest rates are rising, and capital is flowing out of China (As it
is flowing out of other emerging markets). Chinese real GDP
growth will likely remain below trend in 2016 and 2017, and the
industrial core of the Chinese economy will be even weaker than
headline GDP statistics would suggest. A trend depreciation of
the yuan is one of two important capital market trends to expect
from China in 2016 and 2017 – the second is increased spillover
of Chinese financial volatility into the country’s exchange rate.
China has liberalized capital flows into its highly volatile domestic
stock markets. While there are still few linkages between China’s
stock market and its domestic economy, limiting the potential for
stock market swings to cause a financial crisis, stock market
volatility will be a more important catalyst of cross-border capital
flows and exchange rate fluctuations in 2016 and 2017 than in
years past.
4.50
4.25
4.00
3.75
3.50
3.25
3.00
2.75
2.50
2.25
2.00
1.75
1.50
1.45
1.40
1.35
Brazilian real per U.S. dollar
PNC
Forecast
Canadian dollars
per U.S. dollar
PNC
Forecast
1.30
1.25
1.20
1.15
1.10
1.05
1.00
0.95
7.2
7.1
7.0
6.9
6.8
6.7
6.6
6.5
6.4
6.3
6.2
6.1
6.0
Chinese yuan per U.S. dollar
PNC Forecast
EXCHANGE RATE FORECASTS
Euro: The European Central Bank disappointed global capital
markets in December by cutting its deposit rate by “only” 0.1
percentage points to negative 0.3 percent, less than market
expectations for a 0.2 percentage point cut. The ECB extended
the minimum end date of its asset purchase program to March
2017 from September 2016, but refrained from increasing its
monthly rate of purchases. The ECB’s staff economists judge
the current amount of monetary stimulus as sufficient to raise
CPI inflation back to 1.6 percent by 2017, close to the ECB’s
target of “below but close to two percent.” Risks to the
Eurozone growth forecast seem fairly balanced: A very
competitively valued euro and low energy prices are supporting
the Eurozone’s trade competitiveness and domestic demand,
creating upside risks to growth, and weak emerging markets
and political risks (from both inside and outside of the
Eurozone) create downside risks. After spiking stronger against
the U.S. dollar after the December ECB decision, the euro will
likely depreciate moderately in 2016 and 2017 as ECB
monetary stimulus continues at its present pace and U.S.
interest rates very gradually rise.
Indian Rupee: Unchanged from PNC’s last forecast, India
continues to look well-situated to weather higher U.S. interest
rates. Economic growth is holding up, with real GDP growth
likely to be between 7.0 percent and 7.5 percent in 2016 and
2017. The Reserve Bank of India’s inflation targeting regime is
increasing the credibility of Indian economic policy: CPI
inflation in the third quarter of 2015 was the lowest since 2004.
Low global commodity prices should keep inflation low and
growth strong: As a net commodity importer and consumer,
low prices of coal, oil, iron ore and other basic materials should
contain India’s inflation, shrink its trade deficit, boost consumer
spending power, support corporate profit margins, and raise
headline real GDP growth. The onset of interest rate hikes in
the United States pushed the rupee modestly weaker against
the dollar in late 2015, but the longer-term outlook for the
rupee still looks stronger than those of other major emerging
market currencies.
Japanese Yen: The Bank of Japan (BoJ), like the ECB,
disappointed capital markets by refraining from expanding its
quantitative easing (QE) program at its December monetary
policy decision. The BoJ made minor tweaks to its QE program,
principally announcing small purchases of Japanese stocks
beginning in March 2016 to offset long-planned stock sales. But
notably, three of the nine members of the BoJ Policy Board
voted against these stock purchases. While low oil prices keep
alive the possibility of further easing from the BoJ, December’s
split vote on a small-bore expansion in stimulus suggests
limited appetite for more aggressive monetary easing. If the
BoJ leaves monetary policy unchanged from its current stance
in 2016 and the first half of 2017, the divergence between the
U.S. and Japanese monetary stances should widen, creating
room for some modest additional depreciation of the yen vis-avis the dollar.
1.45
1.40
U.S. dollars per euro
1.35
1.30
1.25
1.20
1.15
1.10
1.05
1.00
72
PNC Forecast
Indian rupees per U.S. dollar
68
64
PNC Forecast
60
56
52
48
135
Japanese yen per U.S. dollar
125
115
105
95
85
75
PNC Forecast
EXCHANGE RATE FORECASTS
Korean Won: The Bank of Korea (BoK) opened 2016
concerned about weak Korean growth and inflation, and
determined to pursue an “accommodative” monetary policy;
the BoK also lowered its inflation target to 2.0 percent from its
previous 2.5-3.5 percent target range. At the same time, the
BoK is concerned about potential global financial volatility as
U.S. interest rates rise; domestically, financial risks from highly
indebted households and financially fragile corporate borrowers
are also concerns. The BoK is likely to leave its benchmark base
rate on hold at 1.50 percent in 2016 (unchanged since June
2015) and closely monitor the won exchange rate and
international capital flows for risks to Korean economic and
financial stability. Like the yen, the won is likely to depreciate
modestly against the U.S. dollar in 2016 and 2017 as U.S.
short-term interest rates rise and Korean monetary policy
maintains its accommodative stance.
Mexican Peso: The Bank of Mexico (Banxico) followed the
Federal Reserve in hiking its benchmark interbank target rate
0.25 percentage points to 3.25 percent on December 17.
Banxico spent 2015 signaling loud and clear that Mexican shortterm interest rates are very likely to closely track comparable
U.S. benchmarks as the Fed very gradually raises U.S. rates,
making the December rate hike nearly a foregone conclusion.
Viewed in isolation, Mexico’s domestic economic conditions
could justify a looser monetary policy: The oil correction has
held growth below trend, obvious slack persists in the labor
market, and CPI inflation was near the lowest in half a century
during much of 2015. But Mexico’s economy does not exist in
isolation. The Bank of Mexico is making the very conservative
decision to prioritize financial and exchange rate stability above
economic stimulus in 2016 and 2017. Mexico’s hawkish
monetary stance, low inflation, close economic ties to the
United States, and PNC Economics’ expectation that oil prices
recover all make the peso likely to stabilize against the dollar in
the second half of 2016 and to appreciate against it in 2017.
Pound Sterling: The pound looks likely to stay weaker against
the dollar in 2016 and 2017. In December, Bank of England
(BoE) Governor Mark Carney talked down expectations for an
early 2016 Bank Rate hike, emphasizing that the U.K. is in a
“low for long” interest rate environment. Despite the U.K.’s
tightening labor market, Carney described the late-2015 decline
in global oil prices and depreciation of the yuan as unexpected
developments that are likely to exert downward pressure on
British inflation, making a rate hike less appropriate. Swap
market interest rates in January did not “price in” a BoE rate
hike until December 2016. While spillover from quantitative
easing in the Eurozone could be holding down British interest
rates and making market expectations too dovish, a rate hike
before July seems unlikely. The approach of the “Brexit”
referendum on the U.K.’s membership in the European Union
also seems likely to weigh on the pound. Prime Minister
Cameron is pushing to reach a sweetened deal between the
U.K. and the European Council in early 2016, but endless
Greek-style negotiations are a significant possibility- the Syrian
refugee crisis and Paris terrorist attacks bolster British
Euroskeptics, limiting Cameron’s room to compromise.
1,250
1,225
Korean won per U.S. dollar
1,200
PNC
Forecast
1,175
1,150
1,125
1,100
1,075
1,050
1,025
1,000
18
Mexican pesos per U.S. dollar
17
16
PNC
Forecast
15
14
13
12
1.75
U.S. dollars per U.K. pound sterling
1.70
1.65
1.60
1.55
1.50
1.45
PNC
Forecast
EXCHANGE RATE FORECASTS
Baseline Currency Forecast Table, First Quarter of 2016
Australia
Brazil
Canada
China
Australian $
Real
Canadian $
Yuan
Eurozone
Euro
USD per AUD
BRL per USD
CAD per USD
CNY per USD
USD per EUR
Dec-2011
1.02
1.88
1.02
6.29
1.29
Dec-2012
1.04
2.04
0.99
6.23
1.32
Dec-2013
0.89
2.34
1.06
6.05
1.38
Dec-2014
0.82
2.66
1.16
6.21
1.21
Jun-2015
0.77
3.10
1.25
6.20
1.12
Dec-2015
0.73
3.90
1.38
6.49
1.09
Jun-2016
0.72
4.10
1.38
6.70
1.07
Dec-2016
0.72
4.20
1.37
6.90
1.06
Jun-2017
0.73
4.30
1.36
7.00
1.05
Dec-2017
0.74
4.40
1.35
7.10
1.05
United Kingdom
India
Japan
Korea
Mexico
U.S. Broad
Pound Sterling
Rupee
Yen
Won
Peso
Dollar Index
USD per GBP
INR per USD
JPY per USD
KRW per USD
MXN per USD
Jan '97 = 100
Dec-2011
1.55
53.3
77.6
1,152
14.0
100.6
Dec-2012
1.62
54.8
86.3
1,071
13.0
99.2
Dec-2013
1.65
61.9
105.4
1,055
13.1
101.9
Dec-2014
1.56
63.3
119.8
1,099
14.8
111.3
Jun-2015
1.57
63.8
122.3
1,116
15.7
115.5
Dec-2015
1.48
66.3
120.4
1,173
17.2
123.0
Actual
(month-end)
PNC Forecast
Actual
(month-end)
PNC Forecast
Jun-2016
1.48
66.0
123.0
1,190
17.0
124.1
Dec-2016
1.49
65.0
125.0
1,200
16.8
125.2
Jun-2017
1.50
64.5
126.0
1,210
16.7
125.8
Dec-2017
1.50
64.0
127.0
1,220
16.6
126.2
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
Visit http://www.pnc.com/economicreports to view the full listing of economic reports published by
PNC’s 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. © 2016 The PNC Financial Services Group, Inc. All rights reserved.