CURRENCY MARKETS Canadian dollar - RBC Global Asset Management
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
FALL 2017
CURRENCY MARKETS
Canadian dollar
Dagmara Fijalkowski, MBA, CFA
Head, Global Fixed Income and Currencies (Toronto & London),
RBC Global Asset Management
Three cheers for the Canadian economy. It had been the underdog among developed
economies since oil prices peaked in 2014. Growth expectations were reduced based
on the downturn in energy prices, and then reduced some more after the U.S. election,
when President Trump barged in on the international scene with his declaration to tear
up NAFTA. Yet the Canadian economy has turned out to be the “little engine that could.”
Stronger global growth has helped and is reflected in a stronger domestic expansion in
the first half of 2017. Canada, with a growth potential estimated at 1.4%, grew 3.6% in
the first quarter and 4.5% in the second. Jobs have been added at an average rate of
32,000 in the 12 months ending July, a much faster pace than the 13,900 jobs added
in 2016 and the 9,500 in 2015 (Exhibit 1). Export volumes have risen in the energy,
merchandise and industrial-machinery sectors. Canada’s blistering housing market,
a perpetual source of worry, withstood a slew of macroprudential measures aimed at
cooling it down, but with mortgage rates still low, household debts remain affordable. By
2017, Alberta oil companies had succeeded in reducing their operating and capital costs,
and as a result break-even production prices have fallen by over 25% since 2014.
These positive developments fell onto the parched ground
of expectations, which at the end of May were very, very Exhibit 1: Canadian employment data shows continued
strength
low. The Bank of Canada (BOC) was paying attention and
decided to take advantage of the window of opportunity 40
to undo the interest-rate cuts taken as insurance in 2015.
Average monthly employment gain
30
Deputy Governor Carolyn Wilkins’s comments on June 12th
(12m avg, thousands)
20
hinting that this insurance would no longer be required
10
sent shocks through the investor community, especially
0
foreigners, who became quite weary of the Canadian
housing market and the Canadian currency after Home -10
Capital grabbed the headlines. The reversal of the market’s -20
short positioning helped fuel the loonie’s appreciation. -30
Between early May and end of July, the Canadian dollar -40
rose 10% (Exhibit 2). It was only the fourth move of such 2006 2008 2010 2012 2014 2016
a magnitude in the past decade, following the ones in the Source: Bloomberg, RBC GAM
fall of 2007, the spring of 2009 and the spring of 2016.Currency Markets – Canadian Dollar | Fall 2017
To put the move in context, the options markets assumed 2. Tax changes – while corporate and personal taxes in
on average annual volatility of 8.25% over the past year. the U.S. are likely to fall over the next year, Canadian
Canadian-dollar positioning swung from long U$2 billion personal taxes have been increasing, with the top
in February to a massive short of US$7.3 billion after combined federal and provincial rate in Ontario now
Home Capital and now sits at long US$4.1 billion, the at 53.53% for income above C$220,000. Even in the
most bullish stance in several years (Exhibit 3). So we ask highest taxed states, like California, the combined
ourselves, knowing what drove the currency’s gain and its federal and state tax rate reaches 52.70%, the highest
extraordinary magnitude, is it wise to buy the loonie now? Is federal bracket kicks in at US$418,000 and the highest
a “hawkish” BOC a good enough reason? We believe state tax takes effect beyond US$1 million.
that buying the Canadian dollar at current levels because 3. Tougher provincial labour laws – Alberta and Ontario are
BOC is hiking is like driving a car looking only in the gradually increasing their minimum wages, Alberta by
rearview mirror. 47% and Ontario by 32% over the next two years.
What we should ask is: What’s ahead given that economic 4. Stricter environmental standards – the U.S. has
data surprises have been ratcheted up, the currency withdrawn from its environmental obligations, while
has strengthened and the Trump administration has Canada is moving enthusiastically forward with a
disappointed? How likely is it that current expectations can national minimum carbon tax, ensuring that all provinces
are moving in the same direction.
be further exceeded? Is it likely that an economy that has
surprised by growing 2% above potential can do so again? 5. Electricity prices skyrocket – electricity prices in
Ontario climbed so high earlier this year that the Liberal
While acknowledging a likely slowdown in consumer government had to come up with a relief plan for voters
spending, the BOC is counting on increased exports ahead of next year’s election. Even with the reductions,
and corporate investment to take over as drivers of the the competitiveness of Ontario’s manufacturers has
economy. That would require a large dose of luck in the been severely hurt versus many manufacturing states
face of severe headwinds to Canadian competitiveness that in Mexico.
should become evident over the next year. These are1:
6. Oil prices – the rise of U.S. shale-oil production,
which gives producers the ability to turn wells on and
1. Protectionism – NAFTA objectives for the U.S. include
off with ease, is just the beginning of Canada’s energy
revising the rules of origin, potentially increasing
challenges. The promise of alternative energy such as
minimum U.S. content requirements. The re-negotiation
wind power, as well as electric and automated vehicles,
schedule is unrealistically short in that the agreement
pose longer-term threats to the use of oil as a source
is supposed to be redrawn by the end of the first quarter
of energy.
of 2018.
1
Lascelles, Eric. RBC GAM Weekly Economic Bullets, June 19, 2017
Exhibit 2: Magnitude of recent CAD rally seen only three
Exhibit 3: CAD has seen large swings in positioning
other times in the past decade
20
12
15 10
CAD/USD 3m return (%)
10 8
Net IMM positioning
6
(USD billions)
5
4
0 2
-5 0
-2
-10
-4
-15
-6
-20 -8
2006 2008 2010 2012 2014 2016 2007 2008 2009 2011 2012 2013 2014 2015 2016 2017
Source: Bloomberg, RBC GAM Source: Bloomberg, CFTC, RBC GAM
2 | Currency Markets | Fall 2017Currency Markets – Canadian Dollar | Fall 2017
Exhibit 4: Measures to slow Canadian housing excess
Early
tightening Start of Mid August Fall January April July
efforts 2016 2016 2016 2016 2017 2017 2017
s 3HORTER s (IGHER s -OREPRESSUREON s TAXON s 4IGHTERRULES s -ORTGAGE s TAXON s "ANKOF
AMORTIZATION DOWNPAYMENTS BANKSTOBEMORE FOREIGNBUYERSIN DESIGNATING INSURANCE FOREIGNHOME #ANADA
PERIODS FOR#-(# RESTRAINEDIN 6ANCOUVER hPRIMARY PREMIUMS BUYERSIN HIKESBPS
s 3TRONGER INSURED MORTGAGELENDING s 6ACANCYTAX RESIDENCEv RAISED SOUTHERN/NTARIO
INCOME MORTGAGES s 0UBLICINVESTIGATION s (IGHER s 2ENTCONTROLS
s .EW"#
VERIFICATION OFMORTGAGEFRAUD PROVINCIAL STANDARDSFOR APPLIEDTONEWLY
s 0ROPOSEHIGHER REGULATORFORREAL MORTGAGE BUILTDWELLINGS
CAPITALREQUIREMENTS ESTATEAGENTS INSURANCE s /NTARIO
ONRISKYMORTGAGES MUNICIPALITIES
GIVENPOWERTO
IMPOSEVACANCY
TAX
Source: RBC GAM
The BOC is counting on stronger exports and higher
corporate investments, yet the headwinds above reduce the Exhibit 5: Canada’s current-account deficit
odds of success there. In addition, China’s property bubble
and problems in the country’s overleveraged financial
5.0
system are a risk down the road beyond the all-important
National Congress of the Communist Party in mid-October.
%GDP (4Q rolling sum)
3.0
Slowing Chinese growth and excess capacity are likely to 1.0
put downward pressure on Australia, Latin America and
Canada. As for the cooling of consumer spending, the BOC -1.0
acknowledges that the consumer will probably not be the -3.0
engine of future growth, but its base case is for spending
to level off rather than decline. Cumulative measures taken -5.0
1981 1986 1991 1996 2001 2006 2011 2016
over the past couple of years to limit excessive risk-taking Goods and services Primary income/transfers
in the Canadian housing market, combined with higher Current account balance
interest rates, are much more likely to cool household
Source: Bloomberg, RBC GAM
spending (Exhibit 4). The marginal domestic home buyer
is stretched. The measures targeted at foreign buyers
“
(15% tax in Vancouver and Toronto) had been bolstered
by the 10% appreciation of the loonie. Those that expect
foreign buyers to return after a quarter or two may be The current backdrop leads us to
underestimating the impact that the combined 25%
increase in costs could have on foreign demand.
believe the Canadian dollar will
fall back to levels that compensate
With a current-account deficit of 3%, the Canadian economy
remains as dependent as ever on foreign funding (Exhibit 5).
for Canada’s lack of
A cheaper Canadian dollar is one lure for foreign investors competitiveness, and that the
”
wanting to make direct investments and buy real estate. currency will have to remain
When it comes to balancing the imbalances, it’s not just the
degree of weakness the currency reaches, but the length
weak for some time.
of time it spends at the weaker side of valuations that has
| 3Currency Markets – Canadian Dollar | Fall 2017
to be considered (Exhibit 6). It requires time to make the
business decisions that would lead to sustainable fuel for Exhibit 6: USDCAD vs. PPP
future currency strength. For example, in the previous cycle
it took 10 years of an undervalued currency to facilitate 1.80
economic adjustment. The current backdrop leads us to 1.60
believe the Canadian dollar will fall back to levels that 1.40
compensate for Canada’s lack of competitiveness, and that
USDCAD
the currency will have to remain weak for some time. Our 1.20
12-month forecast for the loonie is C$1.37. 1.00
This discussion brings us to our longer-term view on the 0.80
direction of the Canadian dollar. We can imagine the 0.60
development of quite a few positives. Weaker energy prices 1973 1978 1983 1988 1993 1998 2003 2008 2013 2018
and restrictive environmental policies may accelerate Spot [1.26 ] PPP [1.19 ] 20% Band [0.95, 1.43]
efforts in Canada to develop alternative energy sources
Source: Bloomberg, RBC GAM
that are cleaner and cheaper than fossil fuels. Moreover,
anti-immigration sentiment in the U.S. may result in an
immigration dividend for Canadian cities. That’s the positive
long-term scenario and we hope it will be the one to unfold.
4 | Currency Markets | Fall 2017Currency Markets – Canadian Dollar | Fall 2017
This report has been provided by RBC Global Asset Management (RBC GAM) for informational purposes only and may not be reproduced,
distributed or published without the written consent of RBC Global Asset Management Inc. (RBC GAM Inc.). In Canada, this report is provided
by RBC GAM Inc. (including Phillips, Hager & North Investment Management). In the United States, this report is provided by RBC Global Asset
Management (U.S.) Inc., a federally registered investment adviser. In Europe and the Middle East, this report is provided by RBC Global Asset
Management (UK) Limited, which is authorised and regulated by the UK Financial Conduct Authority. In Asia, this document is provided by
RBC Investment Management (Asia) Limited, which is registered with the Securities and Futures Commission (SFC) in Hong Kong.
RBC GAM is the asset management division of Royal Bank of Canada (RBC) which includes RBC GAM Inc., RBC Global Asset Management (U.S.)
Inc., RBC Global Asset Management (UK) Limited, the asset management division of RBC Investment Management (Asia) Limited, and BlueBay
Asset Management LLP, which are separate, but affiliated subsidiaries of RBC.
This report has not been reviewed by, and is not registered with any securities or other regulatory authority, and may, where appropriate, be
distributed by the above-listed entities in their respective jurisdictions. Additional information about RBC GAM may be found at
www.rbcgam.com.
This report is not intended to provide legal, accounting, tax, investment, financial or other advice and such information should not be relied
upon for providing such advice. The investment process as described in this report may change over time. The characteristics set forth in this
report are intended as a general illustration of some of the criteria considered in selecting securities for client portfolios. Not all investments in
a client portfolio will meet such criteria. RBC GAM takes reasonable steps to provide up-to-date, accurate and reliable information, and believes
the information to be so when printed. RBC GAM reserves the right at any time and without notice to change, amend or cease publication of the
information.
Any investment and economic outlook information contained in this report has been compiled by RBC GAM from various sources. Information
obtained from third parties is believed to be reliable, but no representation or warranty, express or implied, is made by RBC GAM, its affiliates
or any other person as to its accuracy, completeness or correctness. RBC GAM and its affiliates assume no responsibility for any errors or
omissions.
All opinions and estimates contained in this report constitute RBC GAM’s judgment as of September 10, 2017, are subject to change without
notice and are provided in good faith but without legal responsibility. Interest rates and market conditions are subject to change.
Return estimates are for illustrative purposes only and are not a prediction of returns. Actual returns may be higher or lower than those shown
and may vary substantially over shorter time periods. It is not possible to invest directly in an unmanaged index.
A note on forward-looking statements
This report may contain forward-looking statements about future performance, strategies or prospects, and possible future action. The
words “may,” “could,” “should,” “would,” “suspect,” “outlook,” “believe,” “plan,” “anticipate,” “estimate,” “expect,” “intend,” “forecast,”
“objective” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are not guarantees of
future performance. Forward-looking statements involve inherent risks and uncertainties about general economic factors, so it is possible that
predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution you not to place undue reliance on
these statements as a number of important factors could cause actual events or results to differ materially from those expressed or implied
in any forward-looking statement made. These factors include, but are not limited to, general economic, political and market factors in
Canada, the United States and internationally, interest and foreign exchange rates, global equity and capital markets, business competition,
technological changes, changes in laws and regulations, judicial or regulatory judgments, legal proceedings and catastrophic events. The
above list of important factors that may affect future results is not exhaustive. Before making any investment decisions, we encourage you to
consider these and other factors carefully. All opinions contained in forward-looking statements are subject to change without notice and are
provided in good faith but without legal responsibility.
®/TM Trademark(s) of Royal Bank of Canada. Used under licence.
© RBC Global Asset Management Inc. 2017.
(09/2017) E
CANADIAN DOLLAR - FALL 2017- E 09/11/2017You can also read
