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EUR 3 mo: 1.08 6 mo: 1.09

Our EUR forecast is being amended to reflect an improving political landscape in Europe and less risk of uncertainty surrounding a Eurozone breakup. While the second round of the French election is still a week away, it seems clear that Emmanuel Macron has a commanding lead over Marine Le Pen. French-German interest rate spreads have narrowed, and the overall tone for Europe, politically and economically, is on the mend.

Market psychology and positioning have been overly negative on the EUR related to both European politics and diverging interest rate policies between the Fed and the ECB. Now, the market is in better balance, and we anticipate further consolidation and sideways trading ahead.

The market is beginning to anticipate an end to the ECB QE program sometime late this year or early next year. The EUR has traded in a $1.0500 to $1.1500 range over the past two years.

Euro Table
Euro Graph
 

GBP 3 mo: 1.25 6 mo: 1.25

Since the Brexit vote in June and the collapse of the GBP, the GBP has remained trapped within a trading range of $1.2000 to $1.3000.

Like the euro, an improving political landscape in Europe has had a positive ripple effect on the GBP pulling it higher. Specifically, the GBP has been caught between conflicting dynamics, resulting in short-term trends both up and down over the past few months.

Unknowns surrounding the negotiations of Brexit (hard or soft) continue to provide a negative backdrop for the GBP while U.K. economic growth remains resilient. The GBP could remain in limbo for quite a while as the Brexit negotiations are expected to last months, if not years.

While we still anticipate a weaker GBP, we have to respect the market and market psychology, so we are adjusting our GBP forecast to a higher level.

GBP Table
GBP Graph
 

CAD 3 mo: 1.36 6 mo: 1.38

Up until recently and since September 2016, the CAD had been trapped in a broad consolidative pattern between $1.3000 and $1.3500.

Canadian economic data has been on the upswing for the past few months with improvements in both trade and employment data. The Bank of Canada acknowledges the economic improvement but remains steadfast in staying on hold regarding monetary policy as it sees slack in the economy and no inflationary threats.

Recent White House pronouncements about tariffs on Canadian lumber and renegotiating NAFTA have hurt both the CAD and MXN in the short term. Both currencies remain vulnerable to political bombasts in the near term as the market prices in potentially weaker growth for both countries. 

CAD Table
CAD Graph
 

JPY 3 mo: 111 6 mo: 113

The USD/JPY has been highly correlated (80%) with the movement of the U.S. 10-year yield over the past few months. As U.S. interest rates move higher, the JPY weakens and vice versa…how long this strong relationship is maintained remains to be seen.

Since our last forecast, U.S. interest rates have moved lower, and the JPY has strengthened. Besides a close relationship to the movement in U.S. interest rates, the JPY is also caught in the crossfire between geopolitical concerns (safe haven) and activity in the EUR/JPY cross due to European political developments.

The Bank of Japan remains steadfast in its monetary policy, keeping the JPY as a low yielder in hopes of keeping the JPY weak. We remain biased to a weaker JPY going forward, but the market is increasingly resilient to that notion.

JPY Table
JPY Graph
 

AUD 3 mo: .73 6 mo: .74

Last month, we forecast a weaker AUD, and we are pleased to say that our forecast has been bearing fruit.

There are two items at the heart of the weakness: softer commodity prices (iron ore prices in particular) and on-going concerns that the Reserve Bank of Australia remains biased to easing interest rates while the Fed is still positioned for higher interest rates.

Increasing protectionist rhetoric from the White House has also played a part in the recent weakness. How much lower the AUD goes remains in question as expectations regarding world growth are improving and should yield stronger demand for Australian commodities and keep the AUD in demand. 

AUD Table
AUD Graph
 
This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of City National Bank as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make an independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate fluctuations, political and economic risks, and other risks. The Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.