The Canadian dollar

Dec 11, 2020 | Elinesky Schuett Private Wealth Management


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In a week that was short of meaningful developments, we discuss the Canadian dollar, which has been strong of late.

Canadian flag on a pole. It is partially obstructed by bare tree branches. The background is a blurred out city by the water.

Our featured commentary provides you with an update on the coronavirus and the vaccines, along with our thoughts on the movement of the Canadian dollar this year. We have also included links to two interesting podcasts, Global Insight 2021 Outlook and Behind the bank stock rally, that provide additional insights into the movements in the markets and a look towards 2021.

Also this week, we’ve shared an article for snowbirds who may be staying home this year and are wondering what to do with the property that they own in the U.S. As always, we end our weekly blog post with a few good news stories from in and around our community.


Your Weekly Economic Update

Global equity markets were relatively quiet this week. Investors appear to be digesting the broad-based gains made over the last few months while evaluating the near-term headwinds that the virus continues to present. A number of countries, including Canada, approved the emergency use of a vaccine over the past week and the first inoculations have already begun in the United Kingdom. In a week that was short of meaningful developments, we discuss the Canadian dollar, which has been strong of late.

Coronavirus and vaccines

Canada’s rate of new infection growth moderated over the past week. The country’s seven-day moving average of new daily infections is approximately 6,500, versus the 6,000 from the prior week. The East Coast was relatively stable despite some new infections in Prince Edward Island. Meanwhile, Manitoba saw another week of declines, while Saskatchewan’s growth rate was flat. Ontario witnessed an increase, but it was modest compared to Quebec and Alberta which experienced a meaningful jump in the rate of growth in new infections. The country continues to grapple with a virus that is spreading, but there is a vaccine on its way. Health Canada approved the first one for Canadians, and provinces are laying out their plans to begin providing vaccinations to as many as 15,000 people over the next week. High risk groups will be prioritized, including health care professionals and the elderly.

Elsewhere, Europe continues to see a slowing in the spread of the virus, though countries like Germany and the United Kingdom have not seen the same degree of progress as others. Meanwhile, countries ranging from South Africa to Japan continue to face an accelerating second wave. Trends will become clear in the United States in the days to come as the two-week incubation period following the Thanksgiving Day holiday is set to expire. New daily infection figures are elevated in the country, but the most important factor, in our view, is the change in trend, and we expect additional data soon.

The Canadian dollar

Most investors have been focused on the strength of global equity markets in recent months. The focus has understandable given the magnitude of the rally off the lows from March, but other asset classes have rallied too. The Canadian dollar in particular has been noteworthy. It has moved in tandem with Canadian equities this year. Unlike the stock market, which has yet to reach a new peak in 2020, the loonie now sits at a high that has not been seen since 2018.

There are likely two factors responsible for the movement in the Canadian dollar. The first is oil. Earlier this year, oil prices collapsed, driven first by a standoff between Russia and Saudi Arabia, and then by the onset of the global pandemic. While demand remains relatively weak, it has improved, and the behaviour of two of the world’s largest oil producers has become more rational. As a result, oil prices have recouped most of their losses from earlier in the year.

The second has less to do with Canada and more to do with the U.S. dollar itself. The latter is often regarded as a “safe haven” in times of market duress. Unsurprisingly, it benefitted at the expense of most other currencies earlier this year when investors first grew concerned about the virus. Those fears have since abated. As a result, the U.S. dollar has weakened meaningfully against most major currencies. In fact, while the Canadian dollar has been strong relative to the U.S. dollar since the beginning of the summer, it has underperformed most other developed market currencies.  This suggests the loonie’s move has had more to do with U.S. dollar weakness than it has with the strength of Canadian dollar. Nevertheless, we think the backdrop remains supportive in the year ahead. More specifically, a sustainable recovery in the global economy in the second half of 2021 should drive a further recovery in the demand for oil and other commodities, and lead to a higher level of industrial activity. This kind of environment would support more cyclical currencies, like the Canadian dollar.

We welcome a stronger Canadian dollar as it is a sign of more optimism with respect to global growth. While it does present a headwind when converting the returns of our U.S. denominated investments, it is a cost we are often willing to incur because of the importance of maintaining a well-diversified portfolio.


Podcast: Global Insight 2021 Outlook

Mark Bayko and Jim Allworth, members of the Global Portfolio Advisory Committee, discuss the Global Insight 2021 Outlook. They touch on the outlook beyond COVID-19, whether high levels of government debt are a problem, the role of fixed income in portfolios, what to watch for on the inflation front, and the investment stance as we embark on a new year.

Listen to the podcast online: Global Insight 2021 Outlook

 

Podcast: Behind the bank stock rally

Following some volatility towards the end of November, the rebound in global markets is being led by a broad range of stocks and sectors. With bank stocks rallying, Stu Kedwell, Co-Head, North American Equities, shares how Canadian banks are looking beyond the pandemic – and why investors may want to follow suit.

Listen to the podcast or read the transcript online: Behind the bank stock rally

This podcast was recorded December 1, 2020.

 

Staying Home this Winter? What to Do with Your U.S. Property

If you, like many snowbirds, are staying in Canada this winter, you may be wondering what to do about your U.S. property. Should you just leave it vacant? Sell it? What about renting it out?

Moving into the winter months, many Canadians have accepted the recommendation to steer clear of their winter homes in the States. If you’re not using your U.S. property this year, you might be wondering just what to do with it. This article provides some ideas to make it work for you: Staying Home this Winter? What to Do with Your U.S. Property

Community Corner

Each week, we like to end our posts with a few good news stories from in and around the community. We hope that they brighten your day!

As always, we are available to connect with you personally. Please don’t hesitate to contact us at 519-822-2024 or elineskyschuett@rbc.com.