I take a break from my summer getaway to bring you our views on the latest in currency and the Canadian dollar.
Well now that is a new twist isn’t it.
Last Wednesday, July 12, Governor Stephen Poloz of the Bank of Canada raised interest rates 0.25% for the first time in seven years and Janet Yellen of the US Federal Reserve came out with remarks that could lead one to believe she may slow down her rate hikes.
This is a complete reversal from a little over one month ago when both parties were talking exactly the opposite. It all changed after the European Central Banking Forum in Portugal June 26-28.
Major attendees included the Canada’s Stephen Poloz, USA’s Janet Yellen, Britain’s Mark Carney, Japan’s Haruhiko Kuroda, and of course the host Europe’s Mario Draghi.
As I stated previously, since the 2008 stock market crisis the world bankers have been working together on an ever increasing and level to keep the world running as smooth as possible. In the past, policy divergence has caused problems such as currency wars and negative interest rates – a situation where no one wins.
What appears to have come out of this is another concerted effort to move the US Dollar lower. If this is the case it is a similar move that was made in February 2016 which helped boost the price of crude from it’s $26 per barrel doldrums and lowered sovereign borrowing costs worldwide. Meanwhile Europe and Canada both come out of the meeting with a different world view that included raising, not lowering rates.
For Canada the excuse was consumer spending was getting high even tough inflation is well under 2% and that our economy had suddenly increased the number of employed (mostly part time and seasonal mind you but nevertheless an impressive increase) and increased GDP (which was fuelled mostly by the previous mentioned consumer spending). Not much was said around the potential housing bubbles which have apparently cooled off but not blown up or the struggles in our energy sector.
One must consider the implication that a raise of interest rates – which raised Canadian currency versus the USA – creates a hidden tariff on the US, which relies heavily on cheap imports of natural resources from Canada. This could be framed as a pre-emptive strike at Trump for the threats to place tariffs or import taxes, rip up NAFTA or whatever else he has threatened to do. It is widely expected that Trump wants to replace Yellen with his own person and it wouldn’t be surprising if Yellen wants to make her replacement’s job as difficult as possible. What better way to leave your post than with low interest rates accommodating a strong stock market. One can only speculate that leaving a mess for the next person to clean up isn’t out of the question.
Regardless of the motives or strategies we know a few things are happening.
- The Central Banks are doing everything in their power to keep this long in the tooth bull market going
- The European and Emerging markets like China and even the US markets are the recipients of their strategies, at least for now.
- Canadian stocks remain in the doghouse with little interest from foreigners or even Canadians for that matter.
- Janet Yellen is much smarter than anyone has ever given her credit for. She has been an excellent engineer and an under-rated economic leader for the world.
- At some point this engineering will not work. When? Anyone’s guess but nothing lasts forever. When it does, we will follow the flow of cash and be there with you to avoid any potential major destruction to your wealth, it is why you work with us and why we do what we do.
- For now we forge ahead and position ourselves for the best possible outcome.
Enjoy the summer while we take care of business here.
Cooper Schneider Financial