September 2014

EXCHANGE RATE
FORECASTS

DOLLAR STILL HAS ROOM TO TREND STRONGER IN 20152016 AFTER 2013-2014S LARGE GAINS

U.S. dollar broad index, Jan. 1997 = 100

104
103

PNC Forecast

102

101
100
99
98
97

96

1.15

Jun-16

Dec-16

Dec-15

Jun-15

Dec-14

Jun-14

Dec-13

Jun-13

Dec-12

Jun-12

Dec-11

Jun-11

Dec-10

95

U.S. dollars per Australian dollar

1.10
1.05

1.00
0.95
0.90

PNC Forecast

0.85

Dec-16

Jun-16

Dec-15

Jun-15

Dec-14

Jun-14

Dec-13

Jun-13

Dec-12

0.80

Jun-12

Australian Dollar: The Aussie dollar strengthened in the

second quarter of 2014 on stronger Chinese activity indicators,
but signs of a deepening housing correction in China mean this
tailwind for the currency will likely be short-lived. Domestically,
the economic outlook is little changed from earlier in 2014:
moderate growth that will leave the unemployment rate
elevated by historical standards, muting domestic sources of
inflation and justifying the Reserve Bank of Australias
expectations for a continuing period of stability in its
benchmark cash rate, currently 2.5 percent. Australian
monetary policy will likely stay on hold in 2015 as central banks
in the U.S., U.K., and Canada begin to hike rates. As rate hikes
draw nearer in the U.S. and other stronger advanced
economies, the Aussie dollar will likely depreciate.

105

Dec-11

U.S. Dollar: U.S. economic growth gained momentum in spring

2014 after a weather-related slowdown in the 2013-2014
winter months: Job growth was faster in the first half of 2014
than in 2013, and various business and consumer sentiment
indicators reached recovery-to-date highs at mid-year. Against
this strengthening economic backdrop, the Federal Reserve
continues to taper its quantitative easing program, and will
likely cease net new purchases of bonds at the October 2014
Federal Open Market Committee meeting; PNC Economics
forecasts that the Fed will make an initial Federal Funds rate
hike in the second half of 2015. Surprisingly, in the first half of
2014, the dollar index was unaffected by the strengthening
economy and evidence that U.S. interest rates will rise next
year but then shot up in the month of August as the dollar
strengthened suddenly against the euro, pound, yen, peso, and
Loonie. While Augusts sharp gains seem a little overdone, the
dollar does seem likely to continue to trend stronger against
most currencies in 2015 and 2016 as the U.S. unemployment
rate falls further and U.S. interest rates rise.

EXCHANGE RATE FORECASTS

1.10
1.05

PNC Forecast

1.00
0.95
0.90

6.5

Dec-16

Jun-16

Dec-15

Jun-15

Dec-14

Jun-14

Dec-13

Jun-13

Dec-12

Jun-12

Dec-11

0.85

C hinese yuan per U.S. dollar

6.4

6.3
6.2
6.1

PNC Forecast

2.6

Dec-16

Jun-16

Dec-15

Jun-15

Dec-14

Jun-14

Dec-13

Jun-13

Dec-12

Jun-12

6.0

Brazilian real
per U.S. dollar

2.4

PNC Forecast

2.2
2.0
1.8

Dec-16

Jun-16

Dec-15

Jun-15

Dec-14

Jun-14

Dec-13

Jun-13

Dec-12

1.6

Jun-12

Brazilian Real: With the World Cup in the rear mirror, it is a

struggle to come up with anything nice to say about the Brazilian
economy: Inflation is stubbornly stuck at the top of the central
banks 2.5-6.5 percent target range, real GDP contracted in the
first half of 2014, and business sentiment is worse in mid-2014
than at the trough of the global recession in 2009. So what could
possibly explain why the real is still on the stronger side of the
2.2-2.4 per U.S. dollar range it has established since mid-2013?
Politics. Following the sudden and tragic death of Socialist Party
Presidential candidate Eduardo Campos in July, the new Socialist
candidate, Marina Silva, looks to have a shot at beating Workers
Party incumbent Dilma Rousseff in the October 5 election.
Capital markets, fairly or otherwise blaming Rousseff for Brazils
stagflation, have been cheered by the prospect of change. This
political optimism seems a bit nave: the Socialist Partys politics
are close to the Workers Partys dramatic pro-growth
economic reforms are unlikely either way. On balance, the real
seems likely to average weaker in coming quarters as optimism
toward Brazilian politics yields to disappointment, and as the Fed
finishes tapering and begins to raise rates.

C anadian dollars per U.S. dollar

Dec-11

Chinese Yuan: Chinas exchange rate regime continues to

evolve: the yuans old pattern of on-again, off-again appreciation
against the U.S. dollar was in 2014 replaced by its largest
depreciation in 20 years. In the near term, a substantial
appreciation in the final months of 2014 seems likely. Official
Chinese government communications typically describe
exchange rate movements in annual, December 31 to December
31 terms and the next G20 meeting would be quite
embarrassing for Chinas leaders if they have to explain why the
yuan closed 2014 weaker than the 6.05 at which it began the
year. In addition, Chinas trade surplus is widening in the second
half of 2014. Exports to advanced economies are improving, and
the investment which fuels demand for Chinas commodity
imports is weak. In 2015, trend appreciation will likely be
replaced by larger short-term fluctuations of the exchange rate
around a more or less stable long-term level, as the government
follows through on its March 15, 2014 decision to widen the daily
range in which the currency is allowed to trade.

1.15

Dec-11

Canadian Dollar: As in the U.S., economic reports in Canada in

the spring of 2014 have shown the winter slowdown to be mostly
an artifact of harsh weather, rather than a sign of more
fundamental economic weakness. Activity indicators, including
indicators for manufacturing, energy production, and housing,
improved in the second quarter from the first quarters weak
levels, as did unemployment claims. The unemployment rate
should begin to fall in the second half of 2014, and wage growth
should pick up as well as slack in the Canadian labor market is
absorbed. The Bank of Canada (BoC) has under Governor
Stephen Poloz made its policy stance neutral and its next move
data-dependent; stronger labor market indicators should point to
this move being an Overnight Rate hike, which we forecast for
the third quarter of 2015. As evidence grows that a BoC rate
hike is approaching, the Canadian dollar should continue to
retrace some of its unjustifiedly large depreciation of late 2013
and early 2014.

EXCHANGE RATE FORECASTS

U.S. dollars per euro

1.4

1.3
PNC Forecast
1.2

Dec-16
Dec-16

Dec-15

Jun-15

Dec-14

Jun-14

Dec-13

Jun-13

Jun-12

Jun-16

72

Dec-12

1.1

Jun-16

Indian Rupee: The rupee presents a dilemma for market

positioning: The dollar-rupee rate moved above its 200 day
moving average in August for the first time since February
2014, a technical development that preceded several multimonth rupee depreciations over the last decade. On a multiquarter time horizon, by contrast, fundamentals support a
stronger currency: accelerating real GDP growth, cooling
inflation, and improving business and consumer confidence.
These bi-directional risks suggest that the most likely trajectory
for the rupee is slightly weaker through year-end 2014, and
then stronger in 2015 and 2016.

1.5

Dec-11

Euro: The euro broke lower in mid-2014 after the European

Central Bank set a negative deposit rate, effectively charging
commercial banks a penalty for excess reserves held at the
central bank, and announced plans to extend additional longterm loans to Eurozone commercial banks through Targeted
Long Term Refinancing Operations, to be conducted quarterly
beginning in September 2014. Recent economic indicators
suggest that the ECB will eventually have to launch a more
substantial quantitative easing program as well: Eurozone real
GDP growth was a tepid 0.6 percent annualized in the first half
of 2014, and CPI inflation of 0.6 percent in year-ago terms in
the first eight months of 2014 is below the ECBs target of
below but close to two percent. With unemployment high and
recovery slow, monetary policy will stay highly expansionary in
the Eurozone well after the Fed starts to normalize U.S. interest
rates, likely leading to a weaker euro in coming quarters.

Indian rupees per U.S. dollar

68
64
60

PNC Forecast

56
52
48
44

115

Dec-15

Jun-15

Dec-14

Jun-14

Dec-13

Jun-13

Dec-12

Jun-12

Japanese yen per U.S. dollar

110
105

PNC Forecast

100

95
90
85
80

Dec-16

Jun-16

Dec-15

Jun-15

Dec-14

Jun-14

Dec-13

Jun-13

Dec-12

Jun-12

75

Dec-11

Japanese Yen: The yens depreciation against the U.S. dollar

resumed in August 2014 after a long pause in the first half of
2014. Some of the yens weakness might be explained by the
depth of the economys contraction in the second quarter of
2014, but consensus forecasts all seemed prepared for a sharp
downturn after the April 1, 2014 value added tax hike. More
likely, the yens change in direction in August reflected market
recognition that monetary policy in Japan, like in the Eurozone,
was about to diverge from U.S. policy: the Bank of Japan will
likely continue with its highly expansionary Quantitative and
Qualitative Easing policy through 2016, cushioning the
economy through a second value added tax hike in 2016 and
helping to entrench positive inflation expectations. The
divergence between U.S. and Japanese monetary policy should
encourage a trend depreciation in the yen, which will likely
continue until the second half of 2016. If the Bank of Japan is
successful in raising inflation expectations by 2016 as we
forecast, the exit strategy for Japans QE-squared program will
start being discussed around then, likely curtailing the yens
weakening trend.

Dec-11

40

EXCHANGE RATE FORECASTS

1,175
1,150
1,125
1,100
1,075

PNC Forecast

1,050
1,025

14.50

Dec-16

Jun-16

Dec-15

Jun-15

Dec-14

Jun-14

Dec-13

Jun-13

Dec-12

Jun-12

Dec-11

1,000

Mexican pesos per U.S. dollar

14.25
14.00
13.75
13.50
13.25
13.00
12.75

PNC Forecast

12.50
12.25
12.00

1.75

1.70

Dec-16

Jun-16

Dec-15

Jun-15

Dec-14

Jun-14

Dec-13

Jun-13

Dec-12

Jun-12

Dec-11

11.75

U.S. dollars per

U.K. pound sterling
PNC Forecast

1.65
1.60
1.55
1.50

Dec-16

Jun-16

Dec-15

Jun-15

Dec-14

Jun-14

Dec-13

Jun-13

1.45

Dec-12

Pound Sterling: The pound briefly pushed above U.S. $1.70 at

mid-year 2014 on Bank of England commentary that made
clear that the U.K. would be the first major advanced economy
to hike interest rates in 2015; PNCs current forecast is for a
Bank Rate hike at the March 2015 Monetary Policy Committee
(MPC) meeting. After two MPC members voted for an
immediate rate hike at the August 7 decision, a hike earlier in
the first quarter also looks possible. Nevertheless, the pound
plummeted in August on slower than expected wage growth
and a dip in inflation to 1.6 percent. The pounds August drop
seems slightly overdone, especially with such strong evidence
of a Bank Rate hike impending. Over the next few quarters, the
pound is likely to average in the $1.65-$1.70 range it has
established in 2014; the May 2015 parliamentary election may
roil markets if the new government looks likely to follow
through on current Prime Minister Camerons pledge to hold a
referendum on Britains membership in the European Union.

Korean won per U.S. dollar

1,200

Jun-12

Mexican Peso: 2014 has turned into another year of

underwhelming growth for Mexico. While real GDP growth
picked up in the second quarter to a 4.2 percent annualized
increase on stronger construction output and continued
strength in manufactured exports, labor market slack is
substantial and is holding wage increases roughly even with
inflation. The Bank of Mexico cut its growth forecast for 2014 in
May, then made a surprise 50 bps cut to its benchmark
interbank rate to 3.0 percent on June 6. The Mexican rate cut
was less a reaction to the domestic outlook than to the external
environment: continued low interest rates, low capital market
volatility, and ample liquidity for emerging markets. The
Mexican central bank will likely keep its interbank rate at a 3.0
percent premium to the Federal Funds Rate, in the base case
making a first rate hike in the second half of 2015. Continued
capital inflows, spurred by global investors eagerness to
participate in Mexicos energy sector reforms, will be reinforced
by a stable rate premium paid on Mexican assets, likely
supporting a modest trend appreciation of the peso vis--vis
the U.S. dollar.

1,225

Dec-11

Korean Won: Real GDP growth was a disappointing 0.6

percent (not annualized) in the second quarter, as consumption
and especially tourism spending slumped after the Sewol ferry
disaster in April. In response to slowing growth (and perhaps
also to its falling approval ratings), the Korean government
announced a stimulus program of one percent of GDP in public
spending and 2 percent in central bank-supplied credit in late
July; the Bank of Korea also chipped in with a 25 basis point cut
to the benchmark Base Rate, lowering the rate to 2.25 percent
on August 14. The growth outlook is still solid consensus
forecasts are for 3.5-3.8 percent real GDP growth in 2014,
2015 and 2016 but CPI inflation, most recently 1.6 percent in
year-ago terms in July 2014, is well below the Bank of Koreas
2.5-3.5 percent target range, and held down by low import
prices. The won, a riskier, high-yield currency, has broken
through the historically strong level of 1,020 per U.S. dollar
since June 2014, and will likely weaken in 2015 and 2016 as
the Feds taper quenches foreign investors thirst for yield.

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 PNCs
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. 2014 The PNC Financial Services Group, Inc. All rights reserved.