2013 Currency Forecast

Transcription

1 Analytics 2013 Currency Forecast Foreign Exchange & Global Payments

2 In was a year of significant financial and economic stress, especially in the United States and pe. As we enter 2013, the world s major economies are expected to recover from the pressures of 2012, but significant risks still remain. outlook for world growth, developments in pe, global central bank policy, fiscal consolidation plans, shifting sovereign credit ratings, political change and decade-low volatility will be the key themes driving foreign exchange flows in Central bank policy, low volatility and bouts of uncertainty will provide the most interest to currency markets. Please read on as we explore the challenges and opportunities that will face your business in 2013 from a currency and economic perspective. This report includes a discussion on the following topics: Exchange Rate Forecasts United States, & Global Economic Outlook Foreign Exchange In 2013 EXCHANGE RATES - MAJORS 2013 Q1 f 2013 Q2 f 2013 Q3 f 2013 Q4 f USD/CAD EUR/USD GBP/USD EXCHANGE RATES - CROSSES 2013 Q1 f 2013 Q2 f 2013 Q3 f 2013 Q4 f EUR/CAD GBP/CAD CANADIAN ECONOMY 2013 Q1 f 2013 Q2 f 2013 Q3 f 2013 Q4 f Real GDP(Annual % Change) CPI Bank of Canada Interest Rate (%) 1% 1% 1% 1% UNITED STATES ECONOMY 2013 Q1 f 2013 Q2 f 2013 Q3 f 2013 Q4 f Real GDP(Annual % Change) CPI US Fed Interest Rate (%) 0.25% 0.25% 0.25% 0.25% COMMODITIES 2013 Q1 f 2013 Q2 f 2013 Q3 f 2013 Q4 f Oil (US$/barrel) Gold (US$/oz) US British

3 Global Economic Outlook Soft Landing In China & India According to the US Conference Board, the global economy has yet to shake off the fallout from the crisis of Global growth dropped to almost 3% in 2012, which indicates that about a half a percentage point has been shaved off the long-term trend since the crisis emerged. This slowing trend will likely continue. Mature economies are still healing the scars of the crisis. But unlike in 2010 and 2011, emerging markets did not pick up the slack in 2012, and won t do so in Uncertainty across the regions from the post-election fiscal cliff question in the U.S. to the Chinese leadership transition and reforms in the Area will continue to have global impacts in sluggish trade and tepid foreign direct investment. Global growth is expected to be less than 3% in Advanced economies are expected to grow by 1.3% in 2013 vs. 1.2% in the previous year. area, in particular, is expected to return to very slow growth of 0.2% after the -0.6% contraction in Overall, growth in developing and emerging economies is projected to drop from 5.5% in 2012 to 4.7% in 2013, with growth falling in China from 7.8 to 6.9% and in India from 5.5 to 4.7%. graph below depicts the expected growth rates of world economies. US economy is expected to grow by 1.8% and Canada is expected to grow by 2.3% in Inited States pe* of which: Area Japan Other Advanced ** All Advacnced Economies GDP growth China India Other Developing Asia Latin America Middle East Africa Russia, Central Asia and Southeast pe *** All Emerging and Developing Economies World Total % *EU-15 refers to states that joined th peam Union before 2004 ** Other advanced economies include Canada, Switzerland, Norway, Iceland, Cyprus, Korea, Australia, Taiwan Procince of Chine, Hongkong, Singapore, NewZealand and Malta *** CIS is Commanwealth of Independent State which includes all former republics of Soviet Union, excluding the Baltic states Source: Conference Board Global Economic Outlook, November 2011 US British

4 US : Fed Policy Driving Weakness US economy needs a weak US to boost exports, just like the zone needs a weak EUR. In Sepetmber 2012, the US economy embarked on a third round of quantitative easing, called QE3, which involved the purchase of USD 40 billion per month of mortgage backed securities. This program was extended further in December 2012 to include the purchase of USD billion per month of treasuries. Quantitative easing is not a new phenomenon. It has been used by the US Federal Reserve in the past and has the effect of flooding the market with US s, thereby reducing the value of the USD. QE program will end in Q One thing is certain: the US dollar will trade with an underlying weak theme vs. all major currencies due to the ultra-lose monetary policy being exercised by the Federal Reserve. Although the US economy is expected to shows signs of improvement in 2013, the lack of a credible fiscal plan in the medium-term will create US weakness. Fed Policy Driving US Weakness FED S TIMELINE QE Launched - $40bn MBS/mth QE3 Expansion - $ 20 to 45bn Treasurys / mth Q4 12 Q4 12 Q1 13 Q2 13 QE3 - Fed signals end of QE Q3 13 Q4 13 Q1 12 Q2 12 Halt reinvestment of MBS Halt reinvestment of Treasurys Fed hikes rates Q3 14 Q4 14 Q1 15 Q2 15 Q3 15 Source : Scotiabank FX Strategy Economics US British

5 To Rally In 2013 A hawkish Bank of Canada, a sound fiscal plan and Canada s triple-a credit rating continue to drive foreign flows into the country and are some of the reasons to buy the dollar versus major currencies in Several Reasons for CAD Strength Bank of Canada is the only central bank among the industrialized nations which continues to talk about interest rate hikes. Higher interest rates are CAD positive and will help the dollar remain strong vs. the EUR, USD and the British in dollar will also benefit from higher mergers and acquisitions activity and as an FX reserve currency of choice. For example, Russia added the dollar as one of its FX reserve currencies in 2012 and other countries may follow suit, especially as the US and weaken in In emerging markets, China and India are expected to hit a soft-landing rather than a hard landing in 2013 with respect to economic growth. In other words, although economic growth is expected to slow down in these countries, a sharp decline in economic growth is not likely. net impact of a soft-landing in these economies will be that of dollar strength. Domestic & External Risks to Economy economy still faces risks which will provide periods of risk aversion, in other words CAD weakness. se periods will present opportunities for businesses to buy the dollar. dollar currently faces two risks: domestic and external. Among the domestic risks are a slowing housing market and climbing household debt. external risks include the US fiscal cliff issue and escalating problems in pe. Despite these risks, there is a larger probability for CAD strength in 2013 due to the number of factors in favor of the economy. US British

6 EU Making Progress, But Significant Tail-End Risks Remain After a year of economic contraction in 2012, the zone is expected to stage a small economic recovery in This progress is likely to be interrupted by periods of extreme uncertainty and swinging market confidence. Our base case for the area envisions a continuance of the current uncertain environment over the medium term, marked by elevated financial volatility and unemployment, political risk, credit differentiation, fiscal tightening and eventually, a timid recovery. In this environment, the EUR is expected to trend lower in following table highlights the progress made by the pean Union so far but at the same time lists the risks that still remain in the EU s path to economic recovery: pe: Making Progress But Significant Risks Remain Problem Developments to date Still needed Remaining tail risk Bank Solvency 1. LTRO - provided liquidity 2. Banking union plans Resolution fund & deposit guarantee facility decreasing Exit OMT - fiscal burden sharing Politics : A framework for a closer fiscal union decreasing Goverment Debt Austerity Balance between growth & austerity a challenging one unchanged Growth Decelerating Faster then expected; most countries in or entering recession This is biggest risk increasing Source: Scotiabank Economic and Market Outlook Presentation (December 5, 2012) US British

7 British : A Bi-Polar View Analysts are divided on the outlook for the British in 2013, one of the main reasons behind this being Bank of England monetary policy. Bank of England (BOE) does not believe that further quantitative easing would be effective at this point, and looks to remain on the sidelines unless economic prospects weaken materially. Policymakers held steadfast on interest rates and further quantitative easing for a third straight meeting in December 2012, demonstrating a reluctance to continue easing. If the BOE decides that further QE is necessary, the British will weaken materially in On the other hand, if it sticks to its current view, the British could pile on significant gains vs. other currencies. In our view, weak underlying economic momentum argues for more QE. UK may have exited recession in the third quarter of 2012 (with a 1.0% expansion in GDP backed by a 1.3% advance in the services sector), but a sustainable broad-based recovery is by no means guaranteed. In addition, the GBP has followed the trend set by the EUR during several trading sessions in In other words, shocks to the EU system have caused both GBP and EUR weakness despite analyst arguments that the GBP benefits from safe-haven flows during uncertain times in pe. UK has close trade ties to pe therefore weakness in the EU spells weakness for the UK economy. We expect the Sterling to depreciate over the next year but to fare better than the EUR in US British

8 Foreign Exchange In 2013 USD/CAD Even the most bullish estimates for the CAD state the lowest expected rate for 2013 to be 1 USD = CAD. re are only a few analysts forecasting parity (1 USD = 1 CAD) in It is clear that exporters who have receivables in US s will be fighting the tide when it comes to CAD strength in Locking in the USD/CAD rate at PAR would therefore be a very useful hedge. Exporters should view any prices above 1 USD = 1 CAD to be bonus rates for selling USD and buying CAD. For importers who have payables in US s, a winning trade would be a forward contract hedge near 1 USD = 0.96 or 0.97 CAD. EUR/CAD EUR/CAD is considered a cross-pair since it excludes the US dollar, a currency major. With CAD strength on the cards in 2013 and a majority of analysts in consensus that the EUR will weaken in the New Year, a wining trade would be to sell EUR and buy CAD during any EUR rallies. From a long-term hedging standpoint, firms with receivables in EUR will find it beneficial to secure a hedge at any exchange price above GBP/USD: Caution For GBP Sellers As stated in the British outlook, analysts are significantly divided on the direction of the British vs. the USD. While Analytics expects GBP weakness in 2013, the GBP could just as easily climb higher and in fact surprise market participants if the Bank of England remains on the sidelines with respect to quantitative easing in Although GBP/USD upside is limited to 1.64, this pair could have the potential to break much higher if economic data and monetary policy align to create such a scenario. US British

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11 th Avenue,Suite 306 Markham, Ontario,L3R 0B6 Quote Line (Tel) (Fax) ( ) info@mtfx.ca This Report is prepared by as a resource for the clients of and Global. While the information is from sources believed reliable, neither the information nor the forecast shall be taken as a representation for which or any of its employees incur any responsibility.