Market Memo by Gianluca Folino
USD vs. Global Currencies
The most recent narrative I’ve heard coming from financial media is to expect the USD to drop dramatically. Though based on economic data, I find it difficult to validate this. The world is in a high-pressure situation right now and betting on the USD to go down significantly means to expect that the CHY, YEN, EUR, GBP need to all do well (go up) against it. However, all of those economic regions, with the exception of China, are far too economically broken right now to do well. And China, in particular, won't allow its currency to over-strengthen vs. the USD, otherwise, they'll risk hurting their own economy by damaging their export demand. So, if there's no expected major turn around in economies, and therefore no collective global currency effort to strengthen, then there's nothing for the USD, in aggregate, to really weaken against – because remember, currencies trade in pairs relative to each other. And keep in mind, if the USD drops that's usually good news for the S&P 500, not bad. As of right now, the S&P and the USD are effectively like a hedge to each other.
The Canadian Dollar, Banks, and The Economy
USD/CAD specifically though is a more nuanced conversation. Most currency data show USD as overvalued vs. CAD historically, but when you take into account each country's economic circumstances with everything from rates to local risks, I'm not sure I agree that the USD can come down significantly vs. CAD. But that could change depending on how the economic data changes, we’ll see.
Though based on oil, nat gas, and the overall commodity index, we can see it's in crash mode, which isn't good news for the CAD right now. For me to feel positive about the CAD we need global demand to reignite (commodities, shipping rates, oil, data to turn) AND for the Canadian yield curve to uninvert. At the moment, the inversion continues to drag down the banks in Canada, which are the foundation of the Canadian market. And prolonged rate risk in Canada puts pressure on consumer spending power, affordability, and real-estate, which we know is the banks’ largest risk exposure in Canada.
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Gianluca Folino
Financial Advisor, Manulife Securities Incorporated
Life Insurance Advisor, Manulife Securities Insurance Inc.
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