However, bank sees loonie falling through Q4
Strategists at CIBC Capital Markets, who have been predicting near-term strength for the greenback since August, now see the dollar extending its run of gains through the end of the year as the US economy more easily absorbs the blow of higher interest rates relative to global peers.
As many G-10 economies increasingly bear the brunt of soaring yields, the US, less sensitive to a reset in mortgage rates than the likes of Canada and Australia, “is better equipped to deal with higher rates than the market expects,” CIBC strategists led by global head Bipan Rai wrote in a Friday note. Pricing in the market for interest rate futures and for overnight index swaps, however, suggests more than 100 basis points of cuts to come from the Fed by the end of 2024, compared to just 55 basis points in Canada, 15 basis points in Australia and 50 basis points in the Eurozone.
“In the months ahead, we expect more in the way of easing to be priced in by end-2024 for those markets,” Rai said. “That will be consistent with a stronger USD.”
CIBC now expects the euro to fall 2% lower to $1.05 by the end of the year, joining a chorus of Wall Street analysts who have revised their calls on the common currency lower in recent weeks. The Canadian bank sees the loonie falling to 1.39 per dollar through the end of the fourth quarter, also 2% off current levels and a mark last seen in October.
Earlier in the year, CIBC strategists forecast longer-term weakness in the dollar based on valuation metrics, with the risk of rallies in the short run. Now, factors supportive of dollar strength suggest “USD strength will likely stick around for longer than we envisaged at the start of the summer,” Rai said.
CIBC also expects investors to buy dips in the dollar given a worsening environment for risk assets, chiefly driven by an uncertain growth picture in China. According to Rai, China’s primary trading partners like Germany and Australia could be particularly compromised.
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The strategists also noted what appears to be increasingly strained liquidity within the US financial system, as measured by bank reserves and reverse repurchase agreements, that could also be supportive of the greenback.
“The drop in RRP of late suggests that the beta to UST issuance is still high — and that we could be in store for further declines with an abundance of Treasury supply still incoming,” said Rai.
CIBC joins HSBC in calling for a stronger dollar by the end of the year. Overnight, the London-based bank reversed course on its greenback forecast and now predicts the euro to fall to $1.03 by the first quarter of 2024.
