The US Federal Reserve is expected to raise interest rates tomorrow in a move that should sound alarm bells for some Canadian investors
The US Federal Reserve is expected to raise interest rates tomorrow in a move that should sound alarm bells for some Canadian money managers and investors.
Michael Currie, vice president and investment advisor at TD Wealth, said the predicted hike, and the prospect of three or four more down the road, means there is little doubt the Bank of Canada will raise its benchmark rate at least once this year.
Currie said that President Donald Trump’s business-first approach, including his corporate tax cut, means the US is now the “growth engine of the world” and Canadian investors need to wake up to the changing landscape.
“Rate hikes are going to have a big effect,” Currie said. “We’ve seen the Canadian dollar getting weak here. If we see three or four rate hikes in the US, it’s inconceivable we’re not going to have one and maybe two in Canada.
“People are really not taking that into account. Bonds have been falling in Canada; most people who hold bond ETFs are losing money. You’re going to have to look at some strategies to deal with a raising rate market because we’ve spent the last 30 years in a falling rate market.”
Currie added that while the scenario of interest-rate rises in Canada has been discussed in terms of their effect on the housing market, those with a large fixed-income percentage in their portfolio also need to be assessing the situation.
He said: “The US is raising rates because they are showing the best growth. They’ve got a very business-friendly environment down there now, we are seeing companies all around the world expanding there, and we’re seeing companies repatriating money down there.
“I hate to sound unpatriotic, but the States really is the growth engine of the world right now and until something happens to make that change, I’d say that’s still the best market to be in.”
He added: “We’ve just come out of a year and a half, almost two years, of very little happening in the market - slow, steady growth with very little volatility until about a month ago. So there was a reason to be complacent, it’s not always a bad thing – it limits some unnecessary trading.
“[Rate rises] have been talked in Canada in the context of the mortgage and housing market but most people are sitting on 30-40% fixed income in portfolios and that is sometimes looked at as passive and right now the passive approaches aren’t working.”
Aside from interest rates, the other thing that could leave the loonie and the TSX stuck in the quicksand is the limitations around the oil pipelines. Yesterday, the TSX closed down 121.94 points and is down about 4% this year.
He said: “Right now, [the loonie] is still trading in range, but we are very much tied to oil and the politics around pipelines. That will have a big effect on the currency.
“The pipelines are a very, very big issue. It was unbelievable when you see in 2017 that price of oil went up 12% and the TSX energy sector fell 13%. They usually move in lockstep, so that tells me it’s all about the fact that there are so many restrictions on what they can do with oil and where they can ship it.
“We’re stuck, we only have one customer, which is the States, so they are setting the price and it’s well below the markets. So until something happens in that department and we get some pipelines and can move some oil to Asia, remember that’s 20% of the Toronto stock market, it’s hard to see a big upward trajectory for the dollar of the TSX.”
