September 2014

EXCHANGE RATE
FORECASTS

DOLLAR STILL HAS ROOM TO TREND STRONGER IN 2015-

2016 AFTER 2013-2014S LARGE GAINS

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

105
2014 after a weather-related slowdown in the 2013-2014 U.S. dollar broad index, Jan. 1997 = 100
104
winter months: Job growth was faster in the first half of 2014
than in 2013, and various business and consumer sentiment 103
PNC Forecast
indicators reached recovery-to-date highs at mid-year. Against 102
this strengthening economic backdrop, the Federal Reserve 101
continues to taper its quantitative easing program, and will 100
likely cease net new purchases of bonds at the October 2014 99
Federal Open Market Committee meeting; PNC Economics 98
forecasts that the Fed will make an initial Federal Funds rate 97
hike in the second half of 2015. Surprisingly, in the first half of
96
2014, the dollar index was unaffected by the strengthening
95
economy and evidence that U.S. interest rates will rise next

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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.

Australian Dollar: The Aussie dollar strengthened in the 1.15

U.S. dollars per Australian dollar
second quarter of 2014 on stronger Chinese activity indicators,
1.10
but signs of a deepening housing correction in China mean this
tailwind for the currency will likely be short-lived. Domestically, 1.05
the economic outlook is little changed from earlier in 2014:
moderate growth that will leave the unemployment rate 1.00
elevated by historical standards, muting domestic sources of 0.95
inflation and justifying the Reserve Bank of Australias
expectations for a continuing period of stability in its 0.90
PNC Forecast
benchmark cash rate, currently 2.5 percent. Australian
0.85
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 0.80
draw nearer in the U.S. and other stronger advanced
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economies, the Aussie dollar will likely depreciate.

 EXCHANGE RATE FORECASTS
Canadian Dollar: As in the U.S., economic reports in Canada in
the spring of 2014 have shown the winter slowdown to be mostly 1.15
C anadian dollars per U.S. dollar
an artifact of harsh weather, rather than a sign of more
fundamental economic weakness. Activity indicators, including 1.10
indicators for manufacturing, energy production, and housing,
1.05
improved in the second quarter from the first quarters weak PNC Forecast
levels, as did unemployment claims. The unemployment rate
1.00
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
0.95
absorbed. The Bank of Canada (BoC) has under Governor
Stephen Poloz made its policy stance neutral and its next move 0.90
data-dependent; stronger labor market indicators should point to
this move being an Overnight Rate hike, which we forecast for 0.85
the third quarter of 2015. As evidence grows that a BoC rate

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hike is approaching, the Canadian dollar should continue to
retrace some of its unjustifiedly large depreciation of late 2013
and early 2014.

Chinese Yuan: Chinas exchange rate regime continues to

evolve: the yuans old pattern of on-again, off-again appreciation
6.5
against the U.S. dollar was in 2014 replaced by its largest C hinese yuan per U.S. dollar
depreciation in 20 years. In the near term, a substantial
appreciation in the final months of 2014 seems likely. Official 6.4
Chinese government communications typically describe
exchange rate movements in annual, December 31 to December 6.3
31 terms and the next G20 meeting would be quite
embarrassing for Chinas leaders if they have to explain why the
6.2
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 6.1
PNC Forecast
the investment which fuels demand for Chinas commodity
imports is weak. In 2015, trend appreciation will likely be 6.0
replaced by larger short-term fluctuations of the exchange rate

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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.

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 2.6
economy: Inflation is stubbornly stuck at the top of the central Brazilian real
per U.S. dollar
banks 2.5-6.5 percent target range, real GDP contracted in the
2.4
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 PNC Forecast
possibly explain why the real is still on the stronger side of the 2.2
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 2.0
Presidential candidate Eduardo Campos in July, the new Socialist
candidate, Marina Silva, looks to have a shot at beating Workers
1.8
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 1.6
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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.
 EXCHANGE RATE FORECASTS
Euro: The euro broke lower in mid-2014 after the European
1.5
Central Bank set a negative deposit rate, effectively charging U.S. dollars per euro
commercial banks a penalty for excess reserves held at the
central bank, and announced plans to extend additional long-
1.4
term loans to Eurozone commercial banks through Targeted
Long Term Refinancing Operations, to be conducted quarterly
beginning in September 2014. Recent economic indicators 1.3
suggest that the ECB will eventually have to launch a more PNC Forecast
substantial quantitative easing program as well: Eurozone real
GDP growth was a tepid 0.6 percent annualized in the first half 1.2
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 1.1
recovery slow, monetary policy will stay highly expansionary in

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the Eurozone well after the Fed starts to normalize U.S. interest
rates, likely leading to a weaker euro in coming quarters.

Indian Rupee: The rupee presents a dilemma for market 72

Indian rupees per U.S. dollar
positioning: The dollar-rupee rate moved above its 200 day 68
moving average in August for the first time since February
2014, a technical development that preceded several multi- 64
month rupee depreciations over the last decade. On a multi- 60
quarter time horizon, by contrast, fundamentals support a PNC Forecast
56
stronger currency: accelerating real GDP growth, cooling
inflation, and improving business and consumer confidence. 52
These bi-directional risks suggest that the most likely trajectory
48
for the rupee is slightly weaker through year-end 2014, and
then stronger in 2015 and 2016. 44

40
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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 115
Japanese yen per U.S. dollar
downturn after the April 1, 2014 value added tax hike. More 110
likely, the yens change in direction in August reflected market
105
recognition that monetary policy in Japan, like in the Eurozone, PNC Forecast
was about to diverge from U.S. policy: the Bank of Japan will 100
likely continue with its highly expansionary Quantitative and
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Qualitative Easing policy through 2016, cushioning the
economy through a second value added tax hike in 2016 and 90
helping to entrench positive inflation expectations. The 85
divergence between U.S. and Japanese monetary policy should
encourage a trend depreciation in the yen, which will likely 80
continue until the second half of 2016. If the Bank of Japan is 75
successful in raising inflation expectations by 2016 as we
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forecast, the exit strategy for Japans QE-squared program will

start being discussed around then, likely curtailing the yens
weakening trend.
 EXCHANGE RATE FORECASTS
Korean Won: Real GDP growth was a disappointing 0.6
percent (not annualized) in the second quarter, as consumption 1,225
and especially tourism spending slumped after the Sewol ferry Korean won per U.S. dollar
1,200
disaster in April. In response to slowing growth (and perhaps
also to its falling approval ratings), the Korean government 1,175
announced a stimulus program of one percent of GDP in public 1,150
spending and 2 percent in central bank-supplied credit in late 1,125
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 1,100
on August 14. The growth outlook is still solid consensus 1,075
PNC Forecast
forecasts are for 3.5-3.8 percent real GDP growth in 2014, 1,050
2015 and 2016 but CPI inflation, most recently 1.6 percent in
1,025
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 1,000

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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.

Mexican Peso: 2014 has turned into another year of

underwhelming growth for Mexico. While real GDP growth 14.50
picked up in the second quarter to a 4.2 percent annualized Mexican pesos per U.S. dollar
14.25
increase on stronger construction output and continued 14.00
strength in manufactured exports, labor market slack is 13.75
substantial and is holding wage increases roughly even with
13.50
inflation. The Bank of Mexico cut its growth forecast for 2014 in
13.25
May, then made a surprise 50 bps cut to its benchmark
13.00
interbank rate to 3.0 percent on June 6. The Mexican rate cut
12.75 PNC Forecast
was less a reaction to the domestic outlook than to the external
12.50
environment: continued low interest rates, low capital market
12.25
volatility, and ample liquidity for emerging markets. The
Mexican central bank will likely keep its interbank rate at a 3.0 12.00
percent premium to the Federal Funds Rate, in the base case 11.75

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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.

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

mid-year 2014 on Bank of England commentary that made 1.75
clear that the U.K. would be the first major advanced economy U.S. dollars per
U.K. pound sterling
to hike interest rates in 2015; PNCs current forecast is for a 1.70
PNC Forecast
Bank Rate hike at the March 2015 Monetary Policy Committee
(MPC) meeting. After two MPC members voted for an 1.65
immediate rate hike at the August 7 decision, a hike earlier in
the first quarter also looks possible. Nevertheless, the pound 1.60
plummeted in August on slower than expected wage growth
and a dip in inflation to 1.6 percent. The pounds August drop 1.55
seems slightly overdone, especially with such strong evidence
of a Bank Rate hike impending. Over the next few quarters, the 1.50
pound is likely to average in the $1.65-$1.70 range it has
established in 2014; the May 2015 parliamentary election may 1.45
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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.
 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.