The BoC’s unofficial lower-loonie policy

The BoC will hold its benchmark interest rate at 0.5% through the year even as the Fed hikes rates more than once, a CIBC economist predicts.

That’s because the BoC is intent on a weaker loonie to support exports, says Benjamin Tal, deputy chief economist of CIBC World Markets.

In a speech at the Canadian Hedge Fund Awards in Toronto on Wednesday, Tal says he sees the BoC remaining on hold even if Fed moves three times this year.

“The Bank of Canada has an agenda, and the agenda is a weaker Canadian dollar,” he says. “Parity was an economic accident.”

He told Advisor.ca following the speech: “We do need to see this rotation from energy to manufacturing. The dollar can help. I do believe that’s the right approach; however, the bank will never admit that’s the case.”

Read: BoC holds rates, notes ‘material excess capacity’

Barry Allan, fixed income manager and founding partner of Marret Asset Management, also sees the Canadian dollar moving lower.

“No central banker can come out and say we need a weaker currency, but if you look around the world, devaluation is one of the major strategies that people with weaker economies are deploying,” Allan says.

The investing environment, characterized by uncertainty, means moving clients to lower risk.

“We’re moving people from more volatile funds like high yield into our enhanced tactical, which is really a cash substitute, where you can earn 4% to 5% with very low volatility,” he says.

Read: Global growth hinges on fiscal stimulus: OECD

The jobs problem

No politician will admit that they can’t fix the jobs problem, Tal says. It’s a massive problem impacted by demographic shifts and technological change and doesn’t have a clear solution.

“That’s the elephant in the room that no politician will ever admit,” Tal says. “I’m talking about the mismatch in the labour market. We have people without jobs and we have jobs without people.”

It’s one of the reasons he expects Donald Trump to be a one-term president. His protectionist policies may sound good but they’re not going to solve underlying labour issues. Other reasons for a single term are that Trump will feel the job is too much work after four years, and will face significant fights with Congress, Tal suggests.

Read: Currency winners and losers for 2017

The biggest fear in China

Tal casts doubt on official statements out of China indicating the country’s growth has stabilized at an annual 6.5%. He sees growth decelerating amid a credit boom that’s fuelled real estate purchases and overbuilding.

The biggest fear in China, he says, is currency devaluation to make exports more competitive.

“If you go to China—I’m sure many of you have visited China—and you speak with people, they will tell you the No. 1 risk for them is a large-scale devaluation of the yuan,” Tal says.

The fears are encouraging Chinese investors and savers to move their money into assets outside the country, particularly in real estate, despite government efforts to stop outflows of money. “The link to the condo market in Toronto and Vancouver is very clear,” he says.

Read: A rate cut is on the table

Bond correction?

Bond portfolios could be impacted by the Fed. Canada will see slightly higher yields from flow-through from the Fed hikes, says Raj Tandon, founding partner of fixed income manager Algonquin Capital.

“We’ve already seen some of it. Unfortunately, investors are starting to see losses in their fixed income portfolios because of that,” Tandon says, noting his firm hedges for interest rate exposure.