Show Transcript
The Bank of Canada kept its key policy rate unchanged, and reiterated its pledge to keep rates at historic lows until the economy recovers. Anthony Okolie speaks with James Orlando, Senior Economist, TD Bank, about the outlook for the Canadian dollar and economic growth.
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[MUSIC PLAYING]
- The bank of Canada kept interest rates unchanged at 25 basis points, but they repledged to keep rates on hold into 2023. James, what's the long term impact of this lower-for-longer policy?
- Yeah, great question, Anthony. When the Bank of Canada pledges for low interest rates, this feeds into sovereign bond yields, so government of Canada bond yields. It feeds into corporate bonds, it feeds into mortgage rates. And what that does-- one of the long-lasting factors of this pandemic-- is that it incentivizes people to borrow more. So I think higher debt levels are going to be a long-lasting factor and an impact of this pandemic, but also from the investor point of view, yields have gone down so much that, for example in safe haven assets, we're looking at negative real returns across the Canada curve right now. And what that means is that investors, whether it be institutions or even retail investors-- they're moving up the risk spectrum, so they're increasing risk in their portfolios. Say, for example, a higher allocation to equities relative to bonds. And I think that increased risk is the second major takeaway in financial markets from this pandemic.
- And we've certainly seen markets move to record highs. There's also a lot of optimism around a potential vaccine next year. What are the implications for monetary policy going forward?
- Yeah, the Bank of Canada talked about that in their announcement today. What they're saying is that the 2021 outlook and beyond that has definitely gotten a lot rosier, right, so we're looking into this post-pandemic world. And that's a world with higher growth, less uncertainty. But even though we have optimism on this vaccine, the next few months are going to be tough. We have high levels of infection rates across the country, and what this does is it increases fear. People change their behaviors. We also have lockdowns that the governments impose and that weighs on things like the job gains that we've been seeing, it weighs on consumer spending. So we do have some great news on the vaccine, but the headwinds over the next few months are going to be tough, so we need to be able to work through that before we can get to the light at the end of that tunnel.
- And I want to talk a little bit about the Canadian dollar, because it's been strong recently. Where do you see the loonie heading the next little while?
- Absolutely true. The Canadian dollar has been a very strong performer versus the US dollar, following really a global trend in major currencies advancing versus the greenback. What we're looking at right now is that we're seeing a big boom in manufacturing globally. People around the world are buying goods such as furniture, exercise equipment, all of that stuff, for the work from home time period. And what that does is it causes a manufacturing demand, and in manufacturing demand, there is demand for raw materials, which Canada is a big exporter of. Things like copper, even forestry products due to the housing boom that we're seeing in Canada and the United States. Energy prices are also increasing decently from the lows of March, and so because of this commodity story, the loonie has absolutely outperformed.
The outlook for the loonie is actually a little bit more favorable, because we actually see a little bit more upside in energy commodities, which is over 40% of our export base, right? So if we actually get a world where we're able to increase mobility-- and remember that energy demand is mostly driven by things like mobility. Driving, flying through with planes-- all of that is going to be a big driver for demand for energy, and that will be increasing demand for oil, which should increase the price. And the Canadian dollar would follow that move, so we're looking, potentially, for the Canadian dollar to be pushing towards that $0.80 level over 2021.
- So bottom line, what should investors take away from this announcement today?
- I think the broad theme is that we've got a couple of months ahead of us while we wait for the vaccine to be available to everyone, and that's going to weigh on economic growth. The government, thankfully, is stepping in to be able to ease that burden. So people that unfortunately might lose their jobs, or aren't able to find a job over the next few months, the government has increased their supports-- also for corporations, too. So that's positive in the sense that they're building that bridge for that post-vaccine time period, and just the news over the last few months on the vaccine-- we're already seeing a vaccine deployment in the UK. That's going to come to Canada, and when that comes to Canada, that would be a boost to economic growth, so I think that's the main thing the Bank of Canada is communicating, is that the future is looking brighter.
- James, thank you very much for your time.
- Thank you.
[THEME MUSIC]
- The bank of Canada kept interest rates unchanged at 25 basis points, but they repledged to keep rates on hold into 2023. James, what's the long term impact of this lower-for-longer policy?
- Yeah, great question, Anthony. When the Bank of Canada pledges for low interest rates, this feeds into sovereign bond yields, so government of Canada bond yields. It feeds into corporate bonds, it feeds into mortgage rates. And what that does-- one of the long-lasting factors of this pandemic-- is that it incentivizes people to borrow more. So I think higher debt levels are going to be a long-lasting factor and an impact of this pandemic, but also from the investor point of view, yields have gone down so much that, for example in safe haven assets, we're looking at negative real returns across the Canada curve right now. And what that means is that investors, whether it be institutions or even retail investors-- they're moving up the risk spectrum, so they're increasing risk in their portfolios. Say, for example, a higher allocation to equities relative to bonds. And I think that increased risk is the second major takeaway in financial markets from this pandemic.
- And we've certainly seen markets move to record highs. There's also a lot of optimism around a potential vaccine next year. What are the implications for monetary policy going forward?
- Yeah, the Bank of Canada talked about that in their announcement today. What they're saying is that the 2021 outlook and beyond that has definitely gotten a lot rosier, right, so we're looking into this post-pandemic world. And that's a world with higher growth, less uncertainty. But even though we have optimism on this vaccine, the next few months are going to be tough. We have high levels of infection rates across the country, and what this does is it increases fear. People change their behaviors. We also have lockdowns that the governments impose and that weighs on things like the job gains that we've been seeing, it weighs on consumer spending. So we do have some great news on the vaccine, but the headwinds over the next few months are going to be tough, so we need to be able to work through that before we can get to the light at the end of that tunnel.
- And I want to talk a little bit about the Canadian dollar, because it's been strong recently. Where do you see the loonie heading the next little while?
- Absolutely true. The Canadian dollar has been a very strong performer versus the US dollar, following really a global trend in major currencies advancing versus the greenback. What we're looking at right now is that we're seeing a big boom in manufacturing globally. People around the world are buying goods such as furniture, exercise equipment, all of that stuff, for the work from home time period. And what that does is it causes a manufacturing demand, and in manufacturing demand, there is demand for raw materials, which Canada is a big exporter of. Things like copper, even forestry products due to the housing boom that we're seeing in Canada and the United States. Energy prices are also increasing decently from the lows of March, and so because of this commodity story, the loonie has absolutely outperformed.
The outlook for the loonie is actually a little bit more favorable, because we actually see a little bit more upside in energy commodities, which is over 40% of our export base, right? So if we actually get a world where we're able to increase mobility-- and remember that energy demand is mostly driven by things like mobility. Driving, flying through with planes-- all of that is going to be a big driver for demand for energy, and that will be increasing demand for oil, which should increase the price. And the Canadian dollar would follow that move, so we're looking, potentially, for the Canadian dollar to be pushing towards that $0.80 level over 2021.
- So bottom line, what should investors take away from this announcement today?
- I think the broad theme is that we've got a couple of months ahead of us while we wait for the vaccine to be available to everyone, and that's going to weigh on economic growth. The government, thankfully, is stepping in to be able to ease that burden. So people that unfortunately might lose their jobs, or aren't able to find a job over the next few months, the government has increased their supports-- also for corporations, too. So that's positive in the sense that they're building that bridge for that post-vaccine time period, and just the news over the last few months on the vaccine-- we're already seeing a vaccine deployment in the UK. That's going to come to Canada, and when that comes to Canada, that would be a boost to economic growth, so I think that's the main thing the Bank of Canada is communicating, is that the future is looking brighter.
- James, thank you very much for your time.
- Thank you.
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