The Bank of Canada left its key policy rate unchanged at 1.25% and maintained a cautious tone highlighting future rate hikes, but implied there was no rush to get there. Michael Craig, Senior Portfolio Manager, TD Asset Management, talks to Sara D’Elia about the four things the BoC is watching, where the loonie could go and how to position your portfolio.
The Bank of Canada left our key policy rate unchanged at 1 and 1/4% as expected. But going forward, they anticipate the economy will grow at a faster pace. Joining us to explain is Michael Craig from TD Asset Management. Thanks for being here.
Thanks for having me.
Going into the statement, Mike, we thought it was going to be a pretty cautious tone, and we heard the same thing this morning. But how did you read the statement?
Well, the bank was certainly middle-of-the-road on their statement. There was nothing too hawkish to read from it. I think, ultimately, the market took it as slightly dovish, bonds rallied somewhat, and the gain and dollar weakened modestly after the statement.
You mentioned the loonie, and we saw it a bit weaker. What's your call on it going forward?
Oh, we think the loonie is going to weaken over the next nine months or so. We think there's a lot of headwinds facing the Canadian economy, and it's sometimes a tug of war between what's going on in the US and what's going on in Canada. When you look at the loonie across a basket of currencies, though, it has been a fairly weak performer this year, particularly against the euro and the sterling.
On some of those key headlines that you're watching, you highlighted there's four things-- three hawkish, one dovish. What can you tell us about that?
Yeah, so the bank's looking at various things that could sway their view of the economy. They are a little bit-- they do point at a risk that the US could grow faster than expected based on tax cuts. So that would lead to more hawkish policy with the BoC. But predominately, the risks are tilted to the downside. They're worried about housing prices rolling over.
They're worried about Canada becoming a less attractive place to invest because of US tax policy and our current policy. And they're also looking at issues with an acceleration in household debt again. So things that they're watching for and the things that we look at to see if it will change the way the bank's thinking about the direction of the economy.
And one of the things your team does is you really look at this from a portfolio management or an asset allocation standpoint. How would you play the market based on what we've heard today?
Well, we still think the biggest story in Canada is the imbalances, and that is the over-reliance on household debt. And in the elevated property sector, we see a similar story in Australia and can kind of look at how the two economies have performed. And the big takeaway is that from an investment standpoint, it still makes sense to have an overweight or a higher allocation in foreign equities-- be it the US, Europe, or Asia versus domestic economies. Because we feel that those jurisdictions will grow faster than Canada in the years to come.
Mike, thanks very much for being here.
Thank you very much for having me.