Strategy Blog


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Asset Allocation & Hedging Decisions Based On Our Canadian Dollar Outlook

Highlights

This macroeconomic view provides the top-down perspective for outlook for the Canadian dollar.

 

The Bank of Canada will announce its next interest rate decision on July 15. Interest rates are a key variable in how the Canadian dollar is valued and as such a key element in our asset allocation (geographic) and hedging (hedge/don’t hedge) decisions.

  • The Canadian economy is possibly on the verge of a mild recession as low oil prices are reducing capital investment
  • Canada’s economic weak economic situation increases the chance of an interest rate cut by the Bank of Canada (or, at the very least, makes the chance of a rate increase essentially zero)

We expect little to no upside potential for the Canadian dollar (i.e. the Canadian dollar remains weak against the U.S. dollar). Therefore, we will look to add unhedged U.S. denominated positions when considering asset allocations in clients’ personalized investment portfolios.

Research & Analysis

1) Economic Growth

 

Canadian economic growth is slowing and we expect the trend will continue. Canada competes in a global economy and with better prospects elsewhere we expect investment in Canada will slow as well. Less investment equals less demand for Canadian dollars which will apply downward pressure on the dollar.

 

Source: Statistics Canada

 

Source: Statistics Canada

 

2) Contributions to Canadian Economic Growth: Energy Sector

 

Canada’s (mainly Alberta’s) oil industry has been hit hard during the last 12 months as oil prices have dropped in the range of 55%-65%. We expect oil and natural gas prices in Canada to remain suppressed over the mid-term (see our blog main page for our most recent analysis). As one would expect, investment in this sector has fallen considerably.

 

Source: Statistics Canada

 

Source: Statistics Canada

Current Strategy

Long-term Investment Strategy

  • Depending on a client’s goals, we will add unhedged U.S. positions to their personalized portfolio

Triggers for Strategy Change

  • Interest rate increases by the Bank of Canada
  • Increase oil price
  • Improving and robust Canadian economy

Categories

Type: Investment Strategy Thesis

Geography: U.S., Canada

Sector: Broad Market

Sub-sector: N/A

Area(s) of Analysis: Canadian GDP, Canadian fixed capital formation, Canadian foreign exchange rates, Canadian oil & gas sector

 

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author's judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. The comments contained herein are general in nature and are not intended to be, nor should be construed to be, legal or tax advice to any particular individual. Accordingly, individuals should consult their own legal or tax advisors for advice with respect to the tax consequences to them, having regard to their own particular circumstances. Richardson GMP Limited is a member of Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.