Canadians will have to get used to a weaker, range-bound loonie for some time
Published Mar 06, 2023 • Last updated 17 hours ago • 3 minute read
7 Comments
Higher interest rates will have a bigger impact on the Canadian economy and inflation than in the U.S., writes Martin Pelletier. Photo by Mark Blinch/Reuters/File Photo A friend of mine was telling me about his family’s trip to Hawaii a few weeks ago. He was shocked at paying US$72 for four acai breakfast bowls, and US$200 for family dinners without any alcohol, at chain restaurants. These prices are shocking in and of themselves, but convert to Canadian currency and $100 for four fruit bowls and $280 for a Denny’s-type dinner seem outrageous.
Advertisement 2 This advertisement has not loaded yet, but your article continues below.
THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLY Subscribe now to read the latest news in your city and across Canada.
Unlimited online access to articles from across Canada with one account Get exclusive access to the National Post ePaper, an electronic replica of the print edition that you can share, download and comment on Enjoy insights and behind-the-scenes analysis from our award-winning journalists Support local journalists and the next generation of journalists Daily puzzles including the New York Times Crossword SUBSCRIBE TO UNLOCK MORE ARTICLES Subscribe now to read the latest news in your city and across Canada.
Unlimited online access to articles from across Canada with one account Get exclusive access to the National Post ePaper, an electronic replica of the print edition that you can share, download and comment on Enjoy insights and behind-the-scenes analysis from our award-winning journalists Support local journalists and the next generation of journalists Daily puzzles including the New York Times Crossword REGISTER TO UNLOCK MORE ARTICLES Create an account or sign in to continue with your reading experience.
Access articles from across Canada with one account Share your thoughts and join the conversation in the comments Enjoy additional articles per month Get email updates from your favourite authors Unfortunately, Canadians will have to get used to a weaker, range-bound loonie for some time. Those days of traveling south and having our dollar on par seem like a distant memory, and will only get more distant in the years to come as three key factors continue to influence our currency.
FP Investor By clicking on the sign up button you consent to receive the above newsletter from Postmedia Network Inc. You may unsubscribe any time by clicking on the unsubscribe link at the bottom of our emails or any newsletter. Postmedia Network Inc. | 365 Bloor Street East, Toronto, Ontario, M4W 3L4 | 416-383-2300
An unstable federal government Article content A minority government plagued by never-ending scandals does little to instil confidence in foreign investors and our dollar.
The invoking of the Emergencies Act (EA) by Justin Trudeau’s government in February 2022 for the first time in Canadian history sent ripples of fear among money managers I spoke with south of the border. I was genuinely worried at the time about a mass exodus of foreign capital if its introduction did not immediately disband the convoys. Luckily, it did, and the EA was quickly concluded.
Advertisement 3 This advertisement has not loaded yet, but your article continues below.
Fast forward a year and you have the same government facing serious allegations about being under the influence of the Chinese government. This is likely going to get worse before it gets better, since this rabbit hole goes so deep that Trudeau’s foundation recently decided to return donated money back to the Chinese government.
Shorter-term mortgages We think rising interest rates will have a much greater impact on Canadians than our American cousins. This is because most mortgage holders in Canada have a term of five years or less, whereas it’s 30 years in the United States. Right now, 99 per cent of mortgages in the U.S. have interest rates below current market rates, according to Goldman Sachs Group Inc. research.
This advertisement has not loaded yet, but your article continues below.
Article content This means higher interest rates will have a bigger impact on the Canadian economy and inflation than in the U.S.
You can already see this in last week’s negative 1.2-per-cent annualized gross domestic product (GDP) print in Canada for December, while U.S. GDP is slowing, but still came in at an annualized 2.7-per-cent expansion.
Consequently, we think the Bank of Canada will refrain from hiking rates further while the U.S. will likely continue, which could put further pressure on the Canadian dollar.
Energy Oil and gas once provided a huge support to our dollar. That has changed because of land-locking energy policies such as Bill C-69 as well as a lack of appetite from capital providers to be seen investing in higher-carbon-emitting projects like the oilsands.
This advertisement has not loaded yet, but your article continues below.
Article content It was the massive amount of capital inflow into the energy sector that drove our dollar higher in the early 2000s and absent this, we think our dollar will remain delinked from oil prices.
Unfortunately, that period when Canada had a higher currency value did nothing to boost our level of productivity, so we still need a low dollar to compete with our neighbours.
4 monks remind investors about some of their bad habits Here’s how to tell if you’re investing or gambling with your money Markets may be bouncing back, but managing risk is as important as ever The average American worker produces US$73.70 of GDP value per hour worked compared to the average Canadian worker who produces just US$57.24, according to Our World in Data. Even more eye-opening is that our GDP per capita is still below 2010 levels in U.S. dollar terms. Let that sink in.
Advertisement 6 This advertisement has not loaded yet, but your article continues below.
Fortunately for investors, the economy doesn’t always equal the stock market, so we think the heavily resource-weighted S&P/TSX composite index will outperform the tech-heavy S&P 500 in the years to come.
But we won’t be counting on this to provide much of a boost to our currency, especially for snowbirds flying south for winter. Perhaps they’ll just have to get used to yogurt bowls for breakfast instead of bacon and eggs.
Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc, operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning.
_____________________________________________________________
If you like this story, sign up for the FP Investor Newsletter.
_____________________________________________________________