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The Canadian dollar has been hovering near a 6-year high against the U.S. dollar. Kim Parlee speaks with Michael Craig, Head of Asset Allocation, TD Asset Management, about the rise of the loonie, where it’s headed, and possible investment implications.
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KIM PARLEE [00:00:03] The loonie is soaring, hovering near a six year high, and some watchers think it is still going to move higher. Here to tell us how it got here, those same forces that got it to this point are going to keep moving is Michael Craig. He's head of asset allocation at TD Asset Management. Mike, always good to see you. Let's just start off with the basics. You know, we've seen I think the loonie is up now, I think 20 percent even since last March. Why?
MICHAEL CRAIG [00:00:28] So a few things, Kim. First off, the commodity markets have been tremendously strong. So the price of the basket of goods we export versus the ones we import has moved. And that has been very bullish, the loonie. Second, the Bank of Canada has been has been a bit more hawkish than the Fed. They already preannounced tapering and it's certainly been one of more hawkish central banks, relatively speaking. And third, Canadian growth has been very solid coming out of the pandemic. It's been solid everywhere, particularly in Canada. And that's added a further tailwind. So like your typical early recovery phases after a recession, the cyclical currencies tend to do quite well. And the CAD has been no exception.
KIM PARLEE [00:01:06] Is it going to continue? I mean, you named a whole bunch of factors there that are moving the loonie higher. When you look at them over the next six months, year or two years, what do you see?
MICHAEL CRAIG [00:01:16] So we got down to 120 or 84 cents, depending on how you look at it. This is a formidable level of resistance and it's backed off a little bit, the Canadian dollar is a bit weaker today. The market is very long, Canadian dollar. Our sense is for the next quarter or two, it'll consolidate, it'll go sideways maybe a bit of the US dollar strength. Longer term factors though, a few things to keep in mind. One, unlike different cycles, we don't see a significant supply response for oil prices for a variety of factors. ESG limited capital going to new projects. So we see oil going higher over the short and medium term and therefore that can be really very bullish for the Canadian dollar. Second, I don't think this concept of differentials between central banks, the Bank of Canada and the Fed is going to materially change. I think the Fed will be far more dovish than previous cycles and that will also be supportive for the CAD. So we don't see going back to parity at all, but certainly 90 cents will be in the cards on a more of a one to three year picture based on what we know today.
KIM PARLEE [00:02:20] Let me ask you to be your own critique, is there anything that could change that outlook if you see something in the next six months?
MICHAEL CRAIG [00:02:27] Well, certainly if we have another you know, God forbid if we have a mutation of this variant that is vaccine resistant and we're back to square one, the world goes back into recession, that would be very damaging to the CAD. Certainly if we saw the Fed do a bit of a U-turn and become far more hawkish tomorrow or into Jackson Hole this summer, that would be definitely negative for the CAD. I don't subscribe a huge probability of those things happening, but those could be a couple of events that could trigger a period of Canadian dollar weakness. But I think the die is cast in many ways that I expect to see a broad dollar weakness and as a result, some degree of Canadian dollar strength, although we are through. You did mention we've rallied 20 percent. I don't I don't see us doing that again. I don't think there's a chance the CAD getting another 20, but certainly 10 would be fair.
KIM PARLEE [00:03:17] And again, to your point, I mean, if any of those things happened, it wouldn't just be bad for the CAD, it'd be bad for everybody, quite frankly, if any of those came to pass. But what are the investment implications of that? For someone who's listening to go okay, they could if they wanted to go longer, the Canadian dollar, but who what else could benefit during this time?
MICHAEL CRAIG [00:03:37] Well, the weaker Canadian dollar that we've really experienced over the last 10 years has been a tremendous tailwind for Canadian busters, because not only did you make returns on your foreign equities, but you had a nice appreciation of foreign currency. So not too dissimilar with the strengthening Canadian dollar, it does add to the headwind. For equities, it's not a huge deal. I don't think that it's going to, it will be somewhat of a headwind, but particularly the US market, many of those companies are global brands, and so currencies don't materially affect their business per se on any given day. And as a result, on the equities face, not too bad. Fixed income, you got to be careful. Returns from fixed income will be dominated by currency, not yields. And so you be careful, for global fixed income mandates, you really need to think about how you manage the currency risk. And then the last bit, a stronger Canadian dollar tends to bode well for Canadian equities, particularly on the financials, energy, materials. And so that would be another space where managing money is all about offsetting risks and looking for diversification. Canadian market has lagged the last 10 years. And I think what I've just told you probably bodes well for much of the Canadian market in the next couple of years, at least in terms of relative performance to global equities.
KIM PARLEE [00:04:51] Mike, always a great round up, thanks so much.
MICHAEL CRAIG [00:04:54] My pleasure.
MICHAEL CRAIG [00:00:28] So a few things, Kim. First off, the commodity markets have been tremendously strong. So the price of the basket of goods we export versus the ones we import has moved. And that has been very bullish, the loonie. Second, the Bank of Canada has been has been a bit more hawkish than the Fed. They already preannounced tapering and it's certainly been one of more hawkish central banks, relatively speaking. And third, Canadian growth has been very solid coming out of the pandemic. It's been solid everywhere, particularly in Canada. And that's added a further tailwind. So like your typical early recovery phases after a recession, the cyclical currencies tend to do quite well. And the CAD has been no exception.
KIM PARLEE [00:01:06] Is it going to continue? I mean, you named a whole bunch of factors there that are moving the loonie higher. When you look at them over the next six months, year or two years, what do you see?
MICHAEL CRAIG [00:01:16] So we got down to 120 or 84 cents, depending on how you look at it. This is a formidable level of resistance and it's backed off a little bit, the Canadian dollar is a bit weaker today. The market is very long, Canadian dollar. Our sense is for the next quarter or two, it'll consolidate, it'll go sideways maybe a bit of the US dollar strength. Longer term factors though, a few things to keep in mind. One, unlike different cycles, we don't see a significant supply response for oil prices for a variety of factors. ESG limited capital going to new projects. So we see oil going higher over the short and medium term and therefore that can be really very bullish for the Canadian dollar. Second, I don't think this concept of differentials between central banks, the Bank of Canada and the Fed is going to materially change. I think the Fed will be far more dovish than previous cycles and that will also be supportive for the CAD. So we don't see going back to parity at all, but certainly 90 cents will be in the cards on a more of a one to three year picture based on what we know today.
KIM PARLEE [00:02:20] Let me ask you to be your own critique, is there anything that could change that outlook if you see something in the next six months?
MICHAEL CRAIG [00:02:27] Well, certainly if we have another you know, God forbid if we have a mutation of this variant that is vaccine resistant and we're back to square one, the world goes back into recession, that would be very damaging to the CAD. Certainly if we saw the Fed do a bit of a U-turn and become far more hawkish tomorrow or into Jackson Hole this summer, that would be definitely negative for the CAD. I don't subscribe a huge probability of those things happening, but those could be a couple of events that could trigger a period of Canadian dollar weakness. But I think the die is cast in many ways that I expect to see a broad dollar weakness and as a result, some degree of Canadian dollar strength, although we are through. You did mention we've rallied 20 percent. I don't I don't see us doing that again. I don't think there's a chance the CAD getting another 20, but certainly 10 would be fair.
KIM PARLEE [00:03:17] And again, to your point, I mean, if any of those things happened, it wouldn't just be bad for the CAD, it'd be bad for everybody, quite frankly, if any of those came to pass. But what are the investment implications of that? For someone who's listening to go okay, they could if they wanted to go longer, the Canadian dollar, but who what else could benefit during this time?
MICHAEL CRAIG [00:03:37] Well, the weaker Canadian dollar that we've really experienced over the last 10 years has been a tremendous tailwind for Canadian busters, because not only did you make returns on your foreign equities, but you had a nice appreciation of foreign currency. So not too dissimilar with the strengthening Canadian dollar, it does add to the headwind. For equities, it's not a huge deal. I don't think that it's going to, it will be somewhat of a headwind, but particularly the US market, many of those companies are global brands, and so currencies don't materially affect their business per se on any given day. And as a result, on the equities face, not too bad. Fixed income, you got to be careful. Returns from fixed income will be dominated by currency, not yields. And so you be careful, for global fixed income mandates, you really need to think about how you manage the currency risk. And then the last bit, a stronger Canadian dollar tends to bode well for Canadian equities, particularly on the financials, energy, materials. And so that would be another space where managing money is all about offsetting risks and looking for diversification. Canadian market has lagged the last 10 years. And I think what I've just told you probably bodes well for much of the Canadian market in the next couple of years, at least in terms of relative performance to global equities.
KIM PARLEE [00:04:51] Mike, always a great round up, thanks so much.
MICHAEL CRAIG [00:04:54] My pleasure.
