Rise of the Canadian Dollar and its Negative Effect
If you are planning a trip to a US$ economy then that trip has become cheaper since the end of May. The weakness in the US$ against most currencies (lack of trump policies getting done) and some relative strength in the CDN$ versus US$ (rates hikes in Canada) has resulted in close to a 12% gain in the CDN$.
So while travel cost less U.S. investments (50%+ of the value of global equity markets) when converted back to CDN$ have a CURRENT value 12% less than at the end of May.
U.S. stocks are up generally but for CDN$ that gain has been temporarily erased by the gain in the CDN$.
I have attached to recent reports by institutional money managers with their views on the CND$ versus US$
IMPORTANT NOTE: most of the move by CDN$ is WEAKNESS in US$ against most currencies.
After a summer of strong economic data, capped off by last week’s 4.5% GDP print, the Bank of Canada (BoC) decided to hike rates yet again, moving to a 1.0% overnight rate and completely unwinding the extraordinary stimulus delivered in response to the oil shock in 2015.
In light of this development please find a client-friendly piece attached from our Chief Economist, Eric Lascelles.
The market was mixed around whether a hike would occur today or in October.
The move is being deemed hawkish as a function of their decision to hike today rather than because of any specific language around future decisions. To us, this implies less certainty about future rate increases.
Looking forward, we think October is a possibility for the next round of hikes, but it would require further significant economic strength in the near-term. A more likely scenario is a December hike at the earliest
Has the outlook for the Canadian dollar now changed?
The recent appreciation of the loonie has been driven by the BoC’s sharp turn towards a tightening bias, and our view is that over the medium-term there are a number of headwinds facing the Canadian economy. These are expected to moderate the long-term upside potential for the currency, and include:
• Protectionism and the risk that NAFTA renegotiations may result in an unfavourable outcome for Canada
• A growing divide between taxation in Canada and the U.S.
• Increasingly tougher labour laws in Ontario and Alberta, particularly as minimum wage increases come into effect
• Stricter environmental standards in Canada
• Higher electricity costs in Ontario, further impacting competitiveness amongst manufacturers
• Oil and the extent to which rising U.S. shale production will contain prices over the medium-term
While we can’t know with certainty that this is the end of CAD strength in the short term, we believe it already provides good medium- and long-term opportunities at current levels.
Fidelity’s lead asset allocator David Wolf was on site with BNN yesterday as the rate hike announcement was made by the Bank of Canada. CLICK HERE to watch David’s full interview.
As many of you know, Fidelity has maintained an underweight to the Canadian economy and Canadian dollar for some time. In the video, David discusses two themes which we feel bring the downside risks which we've been discussing much more into focus:
1) The negative impact on housing from higher rates.
2) The negative impact on exporters from the move in FX.
While short term strengthening of the CAD$ has been a headwind to performance, we feel that these concerns will be the catalysts for underperformance of the Canadian economy and weakening of the Canadian dollar in the longer-term. Our funds positioning continue to reflect this core narrative.
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