In this edition a Scotiabank strategist is definitively not bullish on the loonie, Citi says take profit on “Trump trades”, and an academic judges 20th century thinkers as risers or fallers.
Currency
Four reasons for a weaker loonie ahead
The Canadian dollar is down roughly five per cent against the greenback so far this year and Scotiabank strategists think the down trend has just begun. Strategist Hugo Ste-Marie sees four reasons for further weakness in the loonie.
The relative yields of Canadian and U.S. bonds are, along with crude prices, the primary determinant of the loonie’s value. Higher domestic yields relative to Treasuries suggests stronger economic growth and more foreign investment, which creates bids for the Canadian dollar in global currency markets.
Central bank policy makes Mr. Ste-Marie believe Canadian bond yields will drop faster than U.S. yields - the first reason to expect loonie weakness. Both the Bank of Canada and the Federal Reserve are expected to cut rates but at different speeds. The U.S. economy is growing much faster than Canada’s thanks in large part to a financially, less debt-saddled consumer. The Bank of Canada will therefore cut deeper and sooner, pushing domestic bond yields even lower relative to Treasuries.
Scotiabank does not think even the current yield differential is priced into the domestic currency, which is his reason number two. The loonie’s value is relatively unchanged in the past 12 months (it rallied in the final two months of 2023, which is why it’s down year to date) but the yield differential for the Canadian two-year bond has widened from 42 basis points lower than Treasuries to 102 basis points lower.
Technical analysis and speculative trading play roles in currency markets and Mr. Ste-Marie is concerned that the Canadian dollar might drop below its recent trading range, causing speculators to throw in the towel and sell. The past year has seen the loonie trade between a high of US$0.7600 and a low of US$0.7220. It dropped below US$0.72 in Monday intraday trading and if it stays there it would provide reason number three for domestic currency weakness.
Reason number four is that forward-looking economic growth forecasts keep getting revised lower. Consensus forecasts for 2025 are only down 20 basis points to 1.8 per cent but recent data points like retail sales suggest further downward revisions. Slower growth expectations imply less foreign investment, more rate cuts and lower bond yields.
Mr. Ste-Marie ended his research report with an admission that he hopes he’s wrong about his outlook for the loonie. “Sure, a weaker loonie would benefit exporters and provide a small boost to TSX earnings … but an even weaker currency would not help Canadian businesses to invest more in machinery/equipment/IT, which are all imported and badly needed to solve weak Canadian productivity issues.”
Election
‘Trump trade’ investors are ahead of themselves
The U.S. presidential election is entering the home stretch and asset prices are attempting to discount the results. A recent Wall Street Journal poll has Donald Trump with a narrow lead.
Mr. Trump’s primary economic policies focus on tariffs, which historically have been inflationary and would thus lead to higher bond yields. Higher yields attract more foreign capital and imply a stronger U.S. dollar.
Citi strategist Dirk Willer noted that hedge funds are strapping on U.S. dollar long positions at historically high rates and he believes this reflects belief in a Trump victory. Mr. Willer points to significant duration shortening in fixed income portfolios (selling longer dated bonds to buy shorter terms) as evidence of the same trend.
Citi believes the market is ahead of itself – the polls only narrowly predict a win for Mr. Trump, if at all - and the strategist recommends taking profits on derivative trades benefiting from rising inflation expectations, and a bet on a strengthening of the greenback versus the euro.
Diversions
Is your favourite philosopher a riser or faller?
The Marginal Revolution site linked to academic Arnold Kling’s substack where he published an informal assessment of which 18th and 19th century thinkers have risen or fallen in prominence. I don‘t pretend to know the work of every name mentioned but I both liked the concept and might use the post as a resource to look up some writings by authors I’ve heard of but never read.
Here an excerpt from the section on economists, referencing Austrian-British economist and philosopher Friedrich Hayek: “With Road to Serfdom, Hayek was much more appreciated in middle-brow circles than by elite intellectuals. Now one could say that is reversed. So does that make him a Riser or a Faller?”
The essentials
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Globe Investor highlights
I have this analysis using past returns to demonstrate why REIT returns may end up disappointing.
Goldman Sachs’ chief U.S. equity strategist David Kostin, arguably the most influential American stock forecaster, raised eyebrows last week by predicting meagre long term returns for the S&P 500. Tim Shufelt tells us why we shouldn’t overreact to it.
Tim Kiladze explains why dividend stocks aren’t as lucrative as Canadians might think – even with falling interest rates.
David Berman says the outlook for gold, even after the recent rally, is looking shiny.
John Heinzl presents five super simple ways to play the dividend stock rally using ETFs.
What’s up next
For Canada, a GDP growth estimate for August will be published on Halloween with a month-over-month increase of 0.1 per cent expected. The S&P Global Canada Manufacturing PMI for October is out Nov. 1 and International Merchandise Trade results are released Nov. 5. Job numbers are not out until Nov. 8.
U.S. GDP for the third quarter will be reported Wednesday with 3.0 per cent annualized growth forecasted. The Employment Cost Index, an important inflation indicator, is published the next day. Non-Farm Payrolls will be released with the usual fanfare on Nov. 1 and 120,000 new jobs is the consensus guess. The unemployment rate is also out Nov. 1 as is ISM Manufacturing PMI for October, where a still-contractionary 47.6 is predicted. ISM Services, more important for the U.S. economy but less correlated with S&P 500 profit growth, is published Nov. 5.
For Canadian earnings this week we have Telus Corp. on Wednesday ($0.24 per share expected), Canadian Natural Resources Ltd. ($0.91) and Cenovus Inc. ($0.42) on Thursday followed by Enbridge Inc. ($0.56) Friday.
It’s a big week for U.S. earnings. Highlights include Visa Inc. on Tuesday (US$2.58 per share expected), Meta Platforms Inc. (US$5.24) and Microsoft Corp (US$3.11) on Wednesday, and Apple Inc. (US$1.57) on Thursday.
See our full economic and earnings calendar here (You can bookmark the page - it gets updated weekly)
