USD/CHF, EUR/CHF, USD/CAD, EUR/CAD - Drivers & Targets - Goldman Sachs

Swiss Franc:

FX Forecasts: We maintain our forecast for EUR/CHF of 1.09, 1.09 and 1.10 in 3, 6 and 12 months, which we adopted on December 7. This implies USD/CHF at 1.05, 1.09 and 1.16.

Motivation for Our FX View: We expect the SNB to follow a reactive policy vis-a-vis the ECB, implying that it will likely try to match further potential easing steps by the ECB. The current low level of policy rates limits its room to move somewhat, but more aggressive moves from the ECB will likely force the SNB to respond. We therefore forecast EUR/CHF to be essentially flat on a 12-month horizon.

Monetary Policy and FX Framework: The SNB targets inflation, with a ceiling on CPI set at less than 2% p.a. The SNB typically uses 3-month Libor as its policy instrument. Since January 15, 2015, when the SNB abandoned its minimum rate for EUR/CHF at 1.20, the CHF is an effective managed float, where “opportunistic interventions” will remain the main policy tool for the SNB.

Growth/Inflation Outlook: Swiss inflation has also turned sharply negative again on the back of the strengthening of the CHF. We expect inflation to rebound to -0.1% in 2016 mostly on the back of base effects. The underlying inflation dynamics, however, will remain relatively weak. We expect growth to rebound to 1.5% in 2016 from 0.8% in 2015 as the effect of the CHF appreciation shock wanes.

Monetary Policy Forecast: We think the SNB's increased tolerance for subdued inflation rates reflects in part the limited room to manoeuvre in achieving its price stability mandate, as the remaining set of (un)conventional monetary policy measures often come with a potentially high cost. Nevertheless, owing to Switzerland's status as a small, open 'safe-haven' economy, the SNB's stance will continue to be highly sensitive to exchange rate fluctuations. That said, absent a swift and/or persistent appreciation of the CHF, we expect the SNB to respond only to sufficiently aggressive easing actions from other central banks.

Fiscal Policy Outlook: Switzerland has a low debt-to-GDP ratio; the 2015 budget should show a surplus.

Balance of Payments Situation: The Swiss current account surplus remains strong, owing to a surplus on all components. As a result, the BBoP remains in surplus despite negative net FDI flows. Switzerland’s portfolio flow data are complicated by its position as an international financial centre. 

Canadian Dollar:

FX Forecasts: We forecast $/CAD at 1.32, 1.35 and 1.40 in 3, 6 and 12 months, which we established on July 31. This implies EUR/CAD at 1.37, 1.35 and 1.33.

Motivation for Our FX View: We continue to expect Canada’s growth to lag that of the US as the substantial fall in oil prices weighs on the Canadian economy, in particular business investment. We believe the decline in oil prices has the potential to set in motion an adverse investment cycle, which could weigh materially on growth. While there are early signs that exchange rate-sensitive non-energy exports are picking up, further rebalancing is still needed. After cutting policy rates in January and July, the further declines in oil prices have renewed downside risks to the BoC forecast, and we expect another cut, most likely in April. Persistently low oil prices and diverging monetary policy underpin our FX forecast for a weaker CAD.

Monetary Policy and FX Framework: The BoC operates an inflation targeting regime (2% within a 1%-3% range), with a generally flexible stance on the currency. In the past, the BoC has only commented on FX during periods of disruptive FX price action in terms of levels and/or the speed of a move.

Growth/Inflation Outlook: After running persistently at the lower end of the Bank’s target range, core inflation improved substantially in 2014. The BoC now expects core inflation to run close to its 2% target over the next few years, although it has emphasised that temporary factors, in particular past FX depreciation, are playing a role in that. While the improving US economy and recent CAD weakness should provide some stimulus to exports, we expect the drag from lower capital expenditure in the oil industry to continue to be a drag on growth.

Monetary Policy Forecast: While core inflation is expected to run above the BoC’s 2% target, we and the BoC believe that temporary factors are boosting inflation at the moment. The BoC has estimated that true underlying inflation is running at around 1.5-1.7%.The BoC lowered its growth forecast for 2016 in its January. Monetary Policy Review, but we think there are still downside risks, most notably to the investment outlook. At the same time, the BoC has emphasised that its policies will have little effect on the energy sector, the source for much of its downward revisions. We think the BoC will likely need to cut rates again as the recent exchange rate decline does not look sufficient to offset the tightening in financial conditions elsewhere. 

Fiscal Policy Outlook: The Liberal party won the recent federal election. They have pledged to run a small deficit (up to C$10bn, or 0.5% of GDP) for 3 years.

Balance of Payments Situation: The current account balance remains in deficit due to weak export performance. The BBoP picture has correspondingly deteriorated. Things to Watch: Cyclical domestic growth momentum continues to be an important factor, in addition to exposure to the US business cycle. We are also watching the main drivers of the CAD, especially the oil investment outlook. 

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