This week marked the end of a rather flat month that contained a number of short
periods of turbulence within the global capital markets. Most notable was the surge
in the Canadian Dollar, which up until just 3 days ago had appreciated
approximately 5% for the month!
The rally in the Canadian Dollar, or the depreciation of the US Dollar depending on
how you look at it, began with the FOMC (US Federal Reserve) releasing their April
meeting minutes. The spark within these minutes was a wording change with
respect to the Fed’s economic projections. This change was from “moderating
economic growth in March” to “economic growth has slowed somewhat in part
relating to transitory factors”, as well as the comment that utilization in the labour
market resources was “little changed”. The bond markets quickly reacted,
projecting that it is increasingly unlikely that the US Federal Reserve will be raising
rates at the upcoming June meeting.
In taking a longer term look at the Canadian Dollar we can see that it has fallen
from parity just over two years ago to 90 cents last fall to just over 80 cents today,
actually touching the mid 78 cent level at one point earlier this month. The rise we
saw in our Dollar was largely fueled by strength in commodities such as base metals
and oil. The recent acceleration downward in our Dollar is largely due to the
dramatic 50% decline in oil prices between June 2014 and March 2015. Given that
our Dollar has fallen approximately 25 cents from its cyclical peak, we would say
that we are closer to an end in the Loonie’s depreciation, as it is difficult to envisage
a world where it goes down significantly more from here. But neither we nor anyone
else can credibly be much more precise than that.
Rather than trying to forecast every conceivable variable to try and pin point the day
the Loonie is at its lowest, we will continue to consider the various macro, bottomup,
valuation and sentiment signals we review constantly in order to position clients
appropriately. For many clients this will mean incorporating greater currency
neutrality within the portfolio over the coming months.
Regarding economic statistics this week, US economic growth came to a bit of a
standstill in the first quarter with the GDP showing only slight growth at 0.2%.
Personal consumption expenditures and inventory levels were the primary positive
contributors, while not surprisingly with the rising US Dollar (as noted above) the
trade balance was decidedly negative. In fact had inventory levels showed flat
growth for the quarter, the first quarter GDP for the US would have been a negative
Our view remains that the US and global economy should reaccelerate in H2/15
owing to the decline in nominal and real long-term bond yields globally, lower oil
prices filtering through the economy, and a much higher US$ which has
redistributed demand toward the weakest countries. Within Europe it seems that
their QE experiment is working to stir up inflationary pressures and stimulate loan
growth. Easier monetary conditions led banks to ease credit standards which, in
turn, should stimulate economic activity. Finally, deflationary fears in the Eurozone
seem to be waning, thus with headline and core inflation increasing we continue to
see sustained growth within Europe.
Next week we will be receiving Canadian trade balance, housing statistics and
employment data. Nonfarm payroll data will also be released from our neighbours
to the South, along with European trade balance and retail sales figures.
For the sports fan this weekend is chalked full of events that may be of interest.
Saturday afternoon the 141st running of the Kentucky Derby will take place at the
fabled Churchill Downs. 20 horses will be running for the roses, so for the
equestrian fan among our readers don’t forget the mint julips and fancy hats.
For our readers who are fans of the “sweet science” of boxing, the biggest fight
since Frazier – Ali a generation ago will take place in Las Vegas this weekend with
Floyd Mayweather Jr. and Manny Pacquiao finally getting in the ring in what should
be a very entertaining bout.
And finally, Alix Rogers is in Calgary currently for the Western Canadian Gymnastic
Championships. We just found out that her daughter Ella won the All Round
category for her age group. Congratulations Ella!!
We never forget that working for our clients is an expression of your trust, and we
promise to always uphold that trust. Thank you.
As always, we welcome your feedback.
Have a great weekend.
The Dekker Hewett Group