Investment Managers Securities Analysts

Bermuda & Cayman


“Politics overshadow the macro backdrop, with any hawkish BOE tendencies to remain a minority view until the Brexit fog clears, leading to a relatively stable GBP.” 

– CIBC, FX Themes and Trades Monthly Outlook,
June 21, 2019


Despite the Fed’s dovish shift, we have a neutral view on the US dollar due to our underlying relative optimism for the US economy. Interest rate differentials still favour the US dollar and we stress that Fed interest rate cuts should not be viewed as a done deal but are data dependent. Further, other major central banks have also shifted in the same manner as the Fed. The ECB added monetary stimulus at its March 2019 meeting and now appears to be considering an interest rate cut before year-end. Meanwhile, Bank of Japan Governor Kuroda has signaled he is ready to add stimulus as needed.

Monetary policy divergence could support the Canadian dollar as the Bank of Canada (BOC), unlike the Fed, is expected to keep the benchmark interest rate on hold. Importantly, the BOC’s inflation measure has reached the highest level since 2009 and economic conditions have recently improved. This said, an escalation of trade tensions – in particular the new trade deal replacing NAFTA which has still not been ratified by the US – combined with the general election in October may weigh on the Canadian dollar. For these reasons we expect the Canadian dollar to trade in a range of CA$1.30 to CA$1.34 against the US dollar in Third Quarter 2019.

The euro should remain in a range between $1.11 to $1.15 near term. A persistent stream of weak economic data from the eurozone has prompted downward revisions of growth and inflation forecasts and an interest rate cut and/or a reactivation of quantitative easing from the ECB cannot be ruled out. The ECB has investigated tiering interest rates, commercial banks’ ability to charge negative interest rates, and banks’ ability to charge corporate clients for deposits. However, all of this appears to have limits and has the potential of backfiring by increasing economic divergence within the eurozone. We agree with former ECB President Trichet who

suggested that central banks may need the help of fiscal authorities.

Sterling traders are pricing in a long summer of confusion with little progress on the UK exit strategy from the EU and another probable extension of the October 31, 2019 EU departure date. Brexit aside, the fundamentals for Sterling strength are good and UK economic data continues to show resilience in the face of uncertainty. Michael Saunders, a member of the Bank of England’s Monetary Policy Committee has said the economy will probably move to “significant excess demand” over the next two- to-three years if Brexit goes smoothly, warranting interest rate hikes. However, for now, the central bank is sidelined. Only a resolution of the Brexit drama, which brings some certainty about the future, will be enough to see Sterling once again respond to traditional economic drivers.

The Australian dollar is set to be little changed against most major currencies as the market has already priced in 50 basis points of interest rate cuts by year-end by the central bank on a weakening economic outlook. We expect the Norwegian krone to outperform against most major currencies, assuming that oil prices remain between $50 to $70 per barrel. Norway’s central bank is likely the only exception within G10 by signaling two more interest rate hikes citing a “robust” domestic economy. Outside the oil sector, Norway’s economy is relatively closed and therefore less exposed to global trade wars.

Given numerous geopolitical and economic risks, most notably trade tensions, the Japanese yen and Swiss franc may benefit from safe-haven led demand.