Industry explains how a less hawkish Bank of Canada could leave the Canadian dollar exposed
The dovish tilt from the Bank of Canada amid trade uncertainty and question marks over the Toronto housing market leaves the loonie exposed, according to an industry expert.
Jeff Weniger, asset allocation strategist at WisdomTree, said the environment has changed from the second half of 2017, when the Bank was the most hawkish major central bank in the world.
But the loonie was one of the worst performers in the past few weeks as it became entangled in US President Donald Trump’s threat to impose trade tariffs. On Wednesday, it had slipped to 1.2980 per US dollar.
Weniger said: “The loonie, in particular, has been really caking it, and the shame of the matter is really that in US politics, it’s a political winner to come after China and Mexico, but in order to go after Mexico and with the nature of the trade agreement, Canada gets tossed in there.”
He added that the Bank’s decision to keep the interest rates at 1.25% on Wednesday was expected but that investors need to reassess Governor Stephen Poloz’s position despite Street consensus that the Bank will raise rates to 1.65% for the calendar year, a little more than a hike and a half. Weniger said those forecasting really aggressive monetary tightening may need to recalculate.
He said: “Now suddenly it looks like NAFTA negotiations are going to be extended again and who knows how long this will drone on. The longer it drones on, Stephen Poloz has to, it would seem, balk.
“Furthermore, whether or not it’s reached international circles at this point, there is a major question mark over Toronto housing at this point. Vancouver keeps going, running higher against many prognostications of doom through the years, myself included.
“But with Toronto, it was really a tough second half and at some point these stress tests are going to come in. This is all part of the tightening policy, when you add stress tests, when you add the fiscal side of it at the provincial level where you’re having 15%, now 20% foreign homebuyer tax, which is the case in BC. That’s a major, major obstacle for Asian capital.”
Weniger is not convinced Bay Street has priced in all these obstacles moving forward and believes investors should tread carefully.
He said: “There is a distinct possibility that we get, on net, more of a dovish verbiage out of the Bank of Canada in coming quarters and I think that exposes the loonie a tad.
“That is something worth considerable consideration because Canadian equities would seemingly, all else being equal, struggle in that type of environment. One thing we have been talking about, partly because of our exposure in our Canadian ETF, is we are considerably underweight the banks.
“And so we would hypothesise that is something that would be advantageous for someone who is concerned about the Toronto housing situation, if there is a situation.”
