April 2014
EXCHANGE RATE
FORECASTS
MODEST ROOM FOR A STRONGER U.S. DOLLAR IN 20142015 AFTER 2013’S LARGE GAINS
Australian Dollar: The Reserve Bank of Australia has stated in
recent monetary policy decisions that its benchmark cash rate
could remained unchanged at 2.5 percent “for some time” as
long as domestic growth and price pressures remain tame and
the unemployment rate elevated. The RBA reaffirmed this view
in its April decision. Australia’s resource investment boom has
slowed; in addition, slower emerging market growth and
demand for Australian natural resource exports in 2014 is
holding commodity prices lower. The net effect points to a weak
Australian dollar for the next few quarters. The Aussie dollar
and the Canadian dollar have weakened in parallel in late 2013
and early 2014; on balance, the Australian economy, with
higher unemployment and a larger exposure to China’s
slowdown, seems likely to stay weaker longer than the
Canadian economy does.
105
U.S. dollar broad index, Jan. 1997 = 100
104
103
PNC Forecast
102
101
100
99
98
97
96
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
95
1.15
U.S. dollars per Australian dollar
1.10
1.05
1.00
0.95
0.90
PNC Forecast
0.85
0.80
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
U.S. Dollar: The dollar index has inched higher in 2014 as the
dollar strengthened against the Canadian dollar and Chinese
yuan and softened against the euro and pound. The
greenback’s fundamentals are clear and stable: a downtrending U.S. unemployment rate, and a Federal Reserve Board
that is slowly but surely moving monetary policy toward an exit
from recent years’ unprecedented stimulus. The Fed will likely
end net new purchases of long-term securities under its
quantitative easing program by the fourth quarter of 2014, and
then pause before making a first hike to the Federal funds rate
in the fourth quarter of 2015. The U.S. dollar has strengthened
substantially in the last few years as expectations for a stronger
U.S. recovery and more normal benchmark interest rates were
priced into the currency. Some addition strengthening seems
likely in coming quarters as well, although the large weight in
the dollar index of the Canadian dollar and Chinese yuan, two
currencies that also have room to strengthen, means further
USD appreciation will likely be modest in 2014-2015.
EXCHANGE RATE FORECASTS
Canadian Dollar: The Loonie broke above $1.10 per U.S.
dollar in January 2014 on the combination of a weak December
jobs report, low inflation, and Governor Poloz’s dovish
guidance, which markets interpreted as opening the door to a
rate cut. While Poloz has avoided explicitly talking down the
Canadian dollar, its weakness is favorable to the “rotation of
demand” that Poloz advocates – a strategy of boosting exports
and non-residential investment to compensate for more modest
household consumption and residential investment growth.
With annualized core and headline CPI inflation both close to
the Bank of Canada’s 2.0 percent target in January and
February, and the 6.9 percent unemployment rate in March
equal to its average between 2000 and 2007, the BoC’s next
move looks to be a rate hike, most likely occurring in the first
half of 2015. Its approach should help the Loonie recover some
of its recent losses against the greenback, but Poloz’s
amenability to a weak Loonie makes a return to parity unlikely
anytime soon.
1.15
Chinese Yuan: From mid-January to mid-March, the yuan
depreciated 3.0 percent against the U.S. dollar, the largest
drop in over 20 years. The central bank seems to have
engineered this drop to prep markets for its March 15 decision
to widen the band around the dollar-yuan daily reference rate
in which the exchange rate is allowed to fluctuate – the band is
now two percent around the fix, up from one percent before
March 15. The weaker yuan also coincides with a weakening in
Chinese economic data in the first quarter of 2014; this slow
patch is likely to pass later this year as recent faster loan
growth (January saw the most new loans on record created in
China) spurs a recovery of investment. With the U.S. dollar
expected to strengthen against the euro and yen in the second
half of 2014, Chinese policymakers will likely limit yuan
appreciation, and encourage more bilateral exchange rate
volatility than in years past.
6.50
1.10
1.05
PNC Forecast
1.00
0.95
0.90
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
0.85
C hinese yuan per U.S. dollar
6.40
6.30
6.20
PNC Forecast
6.10
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
6.00
2.60
Brazilian real
per U.S. dollar
2.40
2.20
PNC Forecast
2.00
1.80
1.60
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Brazilian Real: Matching PNC’s November 2014 forecast, the
Banco Central do Brasil (BCB) hiked its benchmark Selic rate to
11.0 percent in early 2014, helping the real recover some of its
late-2013 losses against the U.S. dollar. In fact, the real
strengthened a surprising degree, briefly breaking below 2.2
per U.S. dollar in late March. Market expectations that the BCB
would continue to hike the Selic rate in the second quarter of
2014 aided the real. Weaker poll numbers for President Dilma
Rousseff, who markets (fairly or otherwise) blame for the
deterioration in Brazilian economic growth since 2011, have
also boosted the real; the retrenchment of U.S. long-term
interest rates has not hurt either. These idiosyncratic, and
probably temporary, forces have kept the real at the strong end
of the 2.2 to 2.4 per U.S. dollar range that it has established
since mid-2013. When U.S. interest rates resume their upward
trend, the real seems likely to revert to the middle of the 2.22.4 range.
C anadian dollars per U.S. dollar
EXCHANGE RATE FORECASTS
Euro: The euro strengthened steadily in 2013 and early 2014
despite the common currency area’s meager growth prospects,
record unemployment, and the downward drift in CPI inflation
below the European Central Bank’s (ECB’s) 2.0 percent target.
Inflation by several measures reached the lowest levels since
2009 in early 2014, prodding the ECB to adopt more dovish
forward guidance that commits it to unconventional easing
measures if inflation remains at current low levels. With the Fed
tapering and the ECB presumably on the verge of easing, the
only leg of the FX stool still supporting a strong euro is the
continued inflow of foreign capital to Eurozone commercial
banks as financial investors, who fled the currency area in
2011-2012, increase euro exposure in their investment
portfolios. After this re-allocation is complete, divergent
economic prospects should lead the euro lower against the U.S.
dollar – eventually.
1.50
Indian Rupee: The rupee stabilized in early 2014, breaking
below 60 per U.S. dollar in late March for the first time since
July 2013. As in Brazil, a stronger currency is due to more
hawkish monetary policy and interest rate hikes; an improved
political backdrop going into the April-May national elections;
and less shaky economic data that suggest the worst of India’s
stagflation could be behind it. If inflation and growth continue
to stabilize, the currency could likely hold its value at or just
below 60 per U.S. dollar, which would leave the currency quite
competitively valued on a trade-weighted and inflation adjusted
basis. Risks nevertheless seem weighted toward a weaker
rupee: with U.S. interest rates expected to turn a corner and
rise again in coming months, the driver of India’s “awful
August” of 2013 will be back in the picture.
72
1.40
1.30
PNC Forecast
1.20
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
1.10
Indian rupees per U.S. dollar
68
64
PNC Forecast
60
56
52
48
44
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
40
115
110
Japanese yen per U.S. dollar
105
100
95
PNC Forecast
90
85
80
75
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Japanese Yen: The yen’s appreciation took a pause in early
2014 ahead of the April 1 increase in the value added tax from
5 percent to 8 percent. The value added tax hike is expected to
drag on growth in coming quarters, keeping the door wide open
for the Bank of Japan to continue full speed with its highly
expansionary program of Quantitative and Qualitative Easing –
“QE-Squared.” With the Federal Reserve’s taper well underway
in the second quarter of 2014, the divergence of Japan’s
outlook from the United States’s has yet to translate into a
weaker yen – most likely because the Japanese exchange rate
is inversely correlated with the Japanese stock market, and
Japanese stocks sold off 11 percent in the year-to-date in
anticipation of a post-tax hike slowdown. At some point, the
capital market tail should stop wagging the exchange rate dog
– and when that happens, the yen is likely to resume its trend
weakening vis-à-vis the U.S. dollar.
U.S. dollars per euro
EXCHANGE RATE FORECASTS
Pound Sterling: The British economy’s recovery has closely
paralleled the U.S. recovery in 2013 and 2014: real estate
made a large contribution to growth in 2013, and
unemployment has fallen below the threshold set by the Bank
of England beyond which an interest rate hike becomes a
possibility. As growth continues above trend in 2014, and a
stronger pound and lower global energy prices reduce headline
inflation, the Bank of England is likely to take its time in
normalizing interest rates. A first benchmark rate hike seems
likely in the first half of 2015; from the second half onward,
British interest rates will likely rise in tandem with U.S. rates.
The economic and rate outlook justifies a stronger pound than
was seen in 2013, but the appreciation of early 2014 seems
overdone. A modest reversal would be unsurprising in coming
quarters.
Korean won per U.S. dollar
1,200
1,175
1,150
PNC Forecast
1,125
1,100
1,075
1,050
1,025
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
1,000
14.50
14.25
14.00
13.75
13.50
13.25
13.00
12.75
12.50
12.25
12.00
11.75
Mexican pesos per U.S. dollar
PNC Forecast
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mexican Peso: Growth is gaining traction in the first half of
2014, although slower than hoped. Manufacturing output is a
bright spot, reaching a record high in February 2014, 7.6
percent above its 2008 pre-recession peak. Construction, by
contrast, was in February 2014 still 5.9 percent below the peak
of July, 2012, the month of the Presidential election; postelection reforms to construction subsidy programs sent the
sector into a sharp correction from which it is only now
recovering. With an economy not yet firing on all cylinders,
Mexico’s substantial labor market slack is only gradually being
absorbed: Wage increases will probably be modest in 2014, as
will inflation. The Banco Central de Mexico in March 2014
downgraded its outlook for real GDP growth this year from a
prior forecast for a 3.0-4.0 percent increase, and noted an
improved balance of risks to inflation. The central bank’s
benchmark interbank rate will likely remain unchanged at 3.5
percent for the rest of this year. Longer-term, the growth
outlook should brighten: maquiladoras are increasingly
competitive against Asian manufacturers, and the 2013 oil
industry reforms could transform this laggard sector into a
leader. For the exchange rate, a stable interest rate outlook
and positive growth outlook, as well as the exchange rate's
well-defined trading range since mid-2013, suggest the peso is
likely to be range-bound in the near term.
1,225
1.70
1.65
1.60
U.S. dollars per
U.K. pound sterling
PNC Forecast
1.55
1.50
1.45
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Korean Won: The Korean won appreciated sharply in April
2014 after the International Monetary Fund called the currency
“moderately undervalued in the range of 2-8 percent, with the
upper end of the range seeming more plausible.” The IMF is on
the Bank of Korea’s (BoK’s) back to allow a stronger won since
the country’s current account surplus has widened recently, and
the growth outlook (the BoK expects real GDP growth to
accelerate from 3.0 percent in 2013 to 4.0 percent in 2014) is
also consistent with a strengthening currency. However, the
won’s strength may seem less justified if U.S. long-term
interest rates resume their rising trajectory in the second half
of 2014, as we forecast. As the currency of a net borrower
economy, the won is highly sensitive to fluctuations in global
capital market conditions, which are likely to favor a weaker
won, paralleling the weaker yen, in coming quarters.
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
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.