Trying to forecast what interest rates are going to do in the short, medium or long-term isn’t an easy task. It is why we gave up on following forecasts a long time ago. But the recent jump in the Canadian Loonie to the US Dollar has sparked a lot of questions.
In a surprise turnaround Bank of Canada Governor, Stephen Poloz, shifted his rhetoric of a possible/probable rate hike in July. In fact, ScotiaMcLeod economics posted this morning that they “predict” rate hikes in July, October and again in the first quarter of 2018.
This change of tone caused the Canadian dollar to rally versus the US Dollar and appears to have peaked at the 76/77 level as at time of writing on Thursday, June 27th.
In speaking with various leaders in the industry it appears that the Bank of Canada wanted to get out in front of the US Federal reserve that seem to be pushing for a couple more rate hikes in 2017. Even though the Canadian inflation rate is currently less than 2% there is fear in Central bank land that if our loonie dropped too much, such as to under 70 cents that inflation might really start to climb in Canada as we import so much, especially food, appliances, automobiles and electronics.
If Poloz does go ahead with the July rate hike he risks knocking the Canadian housing market on its haunches, especially the deck of cards that is Toronto.
He would also be raising rates at a time when Crude Oil prices are down and under pressure due to a vast supply of crude worldwide. I will write about oil next week but for this now it is obvious what harm low crude prices has caused to the Canadian energy sector.
What our indicators state is that the US dollar is stronger than the Canadian dollar on a medium and long-term basis. In the short term we are experiencing a bit of an over extension based on the new speculation or as some say, probability that Canada is going to raise 1/4% in July and that the US rate hikes might be already written in.
Given Canada’s dependence on the US economy for selling our exports Poloz has to walk carefully. The last thing he wants is an 80 cent dollar and would we believe he would prefer it to be in that 72 to 74 cent range without dipping below 70.
If you are a snowbird or someone who frequently travels to the US you might consider this a good time to buy some extra USD. In our portfolios we are going to be converting our last hedged US equity ETF to an unhedged version. We can always switch back if the sentiment changes but given the strength of the US economy and the perilous state of Canada’s economy (energy sector suffering and Canadian banks vulnerable to a real estate correction and these are the two biggest drivers of the economy) we use common sense and logic to confirm our indicators and proceed accordingly.
Have a wonderful Canada Day Long weekend. Happy 150 years everyone. Attached is a link to a song many of us recall from 1967 that brought joy to my heart back then and brings the same joy today. https://www.youtube.com/watch?v=Uj4LZB5oarA
As always, our very best.
Director Wealth Management