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How will a weak U.S. dollar impact broader currency markets? What’s driving the strong performance of the Canadian dollar, and how long will it last? This episode, Dan Mitchell, Portfolio Manager, Global Fixed Income & Currencies, weighs in on the current state of currencies and the outlook ahead, as economies reopen. [6 minutes, 30 seconds] (Recorded June 1, 2021)


Hello and welcome to the Download. I'm your host, Dave Richardson, and I am joined today by a new guest, Dan Mitchell, who is a portfolio manager with RBC Global Asset Management in Toronto, with a special expertise around currency. And that's what we'll talk to him about today. Dan, welcome to the podcast.

Hi Dave. Thanks for having me.

So, Dan, we've seen what's been going on with the Canadian dollar this year and obviously a big interest to Canadians. I was always taught in my economics classes and my background in economics and investments, and talking to investors over now 30 years, that the one economic number that any Canadian could tell you on any given day, is the Canadian dollar vs. the U.S. dollar exchange rate. And so, it's always something on people's minds. But we were talking before and you want to start first by looking at the U.S. dollar and what's going on with the U.S. dollar before we come back to Canada. So what's going on with the U.S. dollar and your view on the U.S. dollar against the Canadian dollar and other currency?

That's right. I think when you come up with any forecast or any outlook on any currency, the most important thing to do is start with the broader environment, what's going on in global economies, what's going on with the U.S. dollar, and that's going to broadly dictate the direction of any individual currency. About a year ago, we turned bearish on the U.S. dollar and we remain very focused on the long-term factors that still point to continued decline of the greenback. These are things like trade and fiscal deficits that might have offered a bit of a boost to the U.S. dollar in the short term and the U.S. economy in the short term, but will undoubtedly weigh on the greenback over the longer period of time. Also, valuation models are another headwind. The U.S. dollar is overvalued against a number of different currencies on a number of different models, even after this recent sell-off. And to some extent, the threat of structurally higher inflation in the U.S. will also erode the value of the greenback overtime. Now, we're not expecting runaway inflation or anything. I know you've talked about that in past podcasts, but even inflation of half a percent more than what you'd see in Europe would have an impact if that gap is sustained. So, as I said, there's many other factors aside from those three. But we think the U.S. dollar will continue to fall, maybe by as much as 10 to 20% over the next couple of years, which is certainly material. And the currencies that we expect to benefit most over that period are the cyclical ones. So, currencies that are most tied to commodities, most tied to global growth, will have most to benefit from the global economic reopening once the pandemic passes.

Which of course, gets us to our beloved Canadian dollar – because that is a somewhat cyclical currency?

The Canadian dollar is definitely one of those. There's lots to level with the loony here. And that's one of the reasons why it is amongst the best performing currencies this year. A lot of people, when they look at the Canadian dollar, they immediately tie it to the oil prices and commodities. And that makes sense. But I would note that it's not just oil prices that has an impact on the Canadian dollar or Canadian economy, for that matter. Canada produces a number of other commodities that have all seen an increase in price over the past year, that contributes to a turn in our trade deficit into trade surplus. Lumber is probably the most widely cited over the past couple of weeks, but there's also a number of other agricultural products, metals as well, and other energy commodities that have rallied.

Dan, is that something that we think is going to persist? Is this a short-term thing as we're rebounding from the pandemic, or is this something that you think is going to persist longer-term in terms of that relative strength of the Canadian dollar and other cyclical currencies?

I'm not the commodity expert, but I think it's a combination of both. Lumber prices, for instance, rallied significantly, mostly because of supply side issue. The lumber mills have been shut down. And I think when economies reopen, that will get solved. But there's a number of other commodities that have rallied because of economic growth in the U.S. and in China and other countries in the world as well. And the demand for that commodity strength will continue

As we look around the world, the Canadian dollar somewhat benefited, in the U.S. dollar-Canadian dollar exchange rate, from this revival in some of these commodity prices, along with the weakness in the U.S. dollar. How is the Canadian dollar positioned relative to other currencies around the world?

It’s positioned very well. And in fact, that's part of the reason why it's performing so well. It's a cyclical currency. So again, there's that commodity and economic linkage there, but it's also about domestic growth. Canada is benefiting from fiscal spending both in Canada and the U.S. We've got a labor market that's doing very well. We've got low net debt. We've got immigration that will come back online and all those things that have the central bank in Canada raising the growth forecast, getting a little bit more optimistic. And that's got the market pricing in a quicker and sooner interest rate hiking cycle in Canada than elsewhere.

And that will be fantastically helpful for all of us who are looking forward to the world opening up again and maybe traveling around in Europe, in the United States, Asia, wherever we might want to travel. And having a little bit more power behind our Canadian dollar is always something people appreciate. As well, from a Canadian investment standpoint, currency is something you want to take into account when you are investing outside of Canada, because if you buy a U.S. stock, you convert your Canadian dollars to U.S. dollars, buy the stock, you sell the U.S stock, you bring it back. If the Canadian dollar is appreciated, you buy fewer Canadian dollars so it can have a significant impact. And then in the near term, on the performance of your investments. So, a good thing to talk to your advisor about and an even better thing to listen to experts like Dan and their view on what's going on with the currency. Dan, I can't thank you enough for your time today.

Thanks, Dave. Take care.


Recorded: June 1, 2021

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