FX FORECASTS

François Dupuis, Vice-President and Chief Economist • Mathieu D’Anjou, Senior 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.

A Difficult Start to the Year for the U.S. Dollar

ECONOMIC STUDIES | JANUARY 24, 2018

HIGHLIGHTS

f The U.S. dollar started the year lower against most other currencies. This may seem surprising as the tax reforms passed in the United States boosted expectations for economic growth and inflation, as well as for monetary tightening. However, the optimism regarding economic growth has also increased around the world, preventing the greenback from taking advantage of this, in relative terms. Moreover, increased optimism reduces demand for safe-haven securities, which often penalizes the U.S. dollar. Lastly, the threat of a shutdown of the U.S. government, which has finally happened, did not help the greenback’s situation. Even more recently, the U.S. Treasury Secretary advocated for a weak currency, fueling further depreciation.

f The key rate increase ordered by the Bank of Canada in January gave a shot in the arm to the Canadian dollar, which once again climbed above US$0.81. The appreciation started even before the rate hike was announced, as Canada’s solid economic figures had left little doubt as to the BoC’s decision. Higher oil prices also shored up the loonie at the start of the year. However, it took a temporary hit due to new concerns over the future of the North American Free Trade Agreement (NAFTA).

f The euro is currently bordering on US$1.23. The continued improvement of the euro zone economy is prompting some to bet on a change of stance at the European Central Bank (ECB). In December, the bank revised its growth forecast upward, but it remains rather pessimistic regarding inflation. That being said, the minutes of the last ECB monetary policy meeting showed an interest among the leaders to adjust the official statement to reflect the economic improvements in the euro zone.

f The pound and other European currencies also increased in value. Other central banks in the region are approaching monetary tightening. The Bank of England already began tightening its monetary policy last November. Despite the uncertainty caused by Brexit, the British economy did not stumble, and inflation remains above the target.

f The trend is for an increase in the value of the currencies of emerging countries that are taking advantage of the prevailing optimism. The peso stands out with an increase of nearly 5% since the beginning of the year. The uncertainty surrounding NAFTA had less of an impact on the peso in January.

MAIN FACTORS TO WATCH

f 2018 may generally prove to be difficult for the U.S. currency, which no longer appears to be as attractive, in relative terms.

f The Canadian dollar should remain close to US$0.80 in the short term, but is expected to appreciate slightly in the longer term. The effects of the next expected rate hikes in Canada should be limited by a similar change in interest rates in the United States and by a slight drop in oil prices. Less uncertainty about NAFTA could help the loonie, but the opposite is also possible. The future of this agreement may be clearer in the spring.

f The euro risks being vulnerable to changes to the content of the press releases joining the ECB’s monetary policy decisions. The improvement in the economy no longer justifies keeping any mention of a possible increase in the buying of securities. The ECB could also further clarify when it will begin raising its key interest rate.

#1 BEST OVERALLFORECASTER - CANADA

ECONOMIC STUDIES

2JANUARY 2018 | FX FORECASTS

Main Exchange Rates

YEN Exchange 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 POUND Exchange 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 DOLLAR Exchange 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 DOLLAR Exchange 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 FRANC Exchange 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/€

EURO Exchange rate and trend

Sources: Datastream and Desjardins, Economic Studies

US$/€

1.00

1.10

1.20

1.30

1.40

1.50

2012 2013 2014 2015 2016 2017 2018

Euro zone exchange rate200-day moving average

3JANUARY 2018 | FX FORECASTS

ECONOMIC STUDIES

SPOT PRICE

Jan. 24 -1 month -3 months -6 months -1 year Higher Average Lower

AmericasArgentina – peso 19.3500 7.14 10.49 10.84 21.23 19.3500 16.7426 15.1785Brazil – real 3.2304 -2.89 -0.99 2.62 2.02 3.3389 3.1945 3.0614Canada – (USD/CAD) 1.2435 -2.52 -1.87 -0.56 -5.52 1.3732 1.2935 1.2138Canada – (CAD/USD) 0.8042 2.59 1.91 0.57 5.84 0.8239 0.7731 0.7283Mexico – peso 18.7737 -4.03 -2.44 6.17 -12.09 21.4135 18.7757 17.5037

Asia and South PacificAustralia – (AUD/USD) 0.8000 3.68 2.88 0.96 5.51 0.8059 0.7695 0.7345China – yuan renminbi 6.4048 -2.62 -3.48 -5.13 -6.62 6.9150 6.7311 6.4040Hong Kong – dollar 7.8189 0.01 0.19 0.16 0.79 7.8263 7.7964 7.7566India – rupee 63.7600 -0.41 -2.04 -0.99 -6.42 68.1755 64.8399 63.3400Japan – yen 110.31 -2.62 -3.16 -0.72 -3.07 115.08 111.93 107.85New Zeland – (NZD/USD) 0.7354 4.71 6.55 -1.13 1.48 0.7522 0.7116 0.6810South Korea – won 1,070 -0.87 -5.06 -3.93 -8.20 1,166 1,123 1,061

EuropeDenmark – krona 6.0529 -3.59 -4.36 -5.23 -12.65 7.0750 6.5428 6.0529Euro zone – (EUR/USD) 1.2293 3.88 4.52 5.58 14.30 1.2293 1.1393 1.0526Norway – kroner 7.8233 -6.05 -2.27 -2.29 -6.33 8.6903 8.2359 7.7331Russia – ruble 56.3863 -3.37 -2.15 -6.17 -4.88 60.7687 58.1445 55.9181Sweden – krona 8.0070 -3.84 -2.60 -2.55 -9.50 9.0847 8.4888 7.9198Switzerland – swiss franc 0.9576 -3.25 -3.25 1.23 -4.15 1.0146 0.9819 0.9460United Kingdom – (GBP/USD) 1.4018 4.88 6.86 7.44 12.02 1.4018 1.2975 1.2151

* 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 Q1f Q2f Q3f Q4f Q1f Q2f Q3f Q4f

U.S. dollarCanadian dollar USD/CAD 1.2470 1.2579 1.2500 1.2500 1.2500 1.2346 1.2346 1.2195 1.2048 1.2048Euro EUR/USD 1.1822 1.2008 1.2300 1.2300 1.2400 1.2500 1.2600 1.2800 1.2900 1.3000British pound GBP/USD 1.3417 1.3528 1.3900 1.4000 1.4100 1.4000 1.3800 1.3700 1.3800 1.4000Swiss franc USD/CHF 0.9709 0.9753 0.9600 0.9600 0.9500 0.9500 0.9500 0.9500 0.9400 0.9400Yen USD/JPY 112.49 112.69 111.00 113.00 114.00 115.00 116.00 117.00 118.00 117.00Australian dollar AUD/USD 0.7834 0.7802 0.7900 0.7900 0.7900 0.8000 0.8000 0.8100 0.8100 0.8200Chinese yuan USD/CNY 6.6534 6.5067 6.5000 6.5000 6.4500 6.4000 6.4000 6.3500 6.4000 6.3000Mexican peso USD/MXN 18.25 19.65 18.75 18.75 18.50 18.25 18.25 18.00 18.25 18.00Brazilian real USD/BRL 3.1677 3.3077 3.2500 3.3500 3.3000 3.2500 3.2500 3.2000 3.2000 3.1000

Effective dollar1 88.11 87.47 86.10 86.30 86.00 85.60 85.50 84.90 84.30 83.80

Canadian dollarU.S. dollar CAD/USD 0.8020 0.7950 0.8000 0.8000 0.8000 0.8100 0.8100 0.8200 0.8300 0.8300Euro EUR/CAD 1.4741 1.5105 1.5375 1.5375 1.5500 1.5432 1.5556 1.5610 1.5542 1.5663British pound GBP/CAD 1.6730 1.7016 1.7375 1.7500 1.7625 1.7284 1.7037 1.6707 1.6627 1.6867Swiss franc CAD/CHF 0.7786 0.7753 0.7680 0.7680 0.7600 0.7695 0.7695 0.7790 0.7802 0.7802Yen CAD/JPY 90.21 89.58 88.80 90.40 91.20 93.15 93.96 95.94 97.94 97.11Australian dollar AUD/CAD 0.9768 0.9814 0.9875 0.9875 0.9875 0.9877 0.9877 0.9878 0.9759 0.9880Chinese yuan CAD/CNY 5.3357 5.1726 5.2000 5.2000 5.1600 5.1840 5.1840 5.2070 5.3120 5.2290Mexican peso CAD/MXN 14.64 15.62 15.00 15.00 14.80 14.78 14.78 14.76 15.15 14.94Brazilian real CAD/BRL 2.5404 2.6295 2.6000 2.6800 2.6400 2.6325 2.6325 2.6240 2.6560 2.5730

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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