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Luc De la Durantaye, CIO and managing director of multi-asset and currency management at CIBC Asset Management.

In this sort of scenario and risk scenarios that we depicted, an environment of growth, sluggish growth, and the outlook for the Canadian dollar is kind of challenged because on the one hand, Canada has the private sector in Canada, the corporations and households, have accumulated more debt than in the U.S. Canada’s economic activity might continue to be sluggish, maybe even a bit more sluggish than in the U.S. The U.S. private sector household and corporations are in better shape. In a sluggish environment, oil prices are not necessarily going to be moving in the top end of their recent ranges. From that perspective, we don’t see the sort of the support or impetus for the Canadian dollar to strongly outperform the U.S. dollar.

The U.S. dollar, on a more broad base, would depend to a certain degree on the Federal Reserve. If on the mainline scenario we see like a sort of a flattish U.S. dollar where we see the most risk on the downside for the U.S. dollar is if you’re in an environment where the Fed has to lower interest rates more than expected, that would probably remove the interest rate support that the U.S. dollar has benefited for the last at least two years, and then that would trigger perhaps at least some potential recovery in the global economy if the Fed really surprises on being a bit more dovish. In that scenario would be the scenario where the U.S. dollar would be the weakest, and cyclical currencies, including the Canadian dollar, would be a bit stronger.

We must say though that our sense of the U.S. dollar, it’s already fairly overvalued. As you get to scenarios where economic activity remains sluggish or decline, you do have some downside risks for the U.S. dollar. On the one hand, the Federal Reserve’s lowering interest rates, the U.S. dollar loses its interest rate advantage. If you get a really volatile environment, the U.S. dollar may play as a safe haven, but we would rather be in the yen, in the Swiss franc, and even in certain cases where the Chinese renminbi as diversifier and as ways to protect the portfolio rather than have a big bet on the U.S. dollar on the upside.

CIBC Multi-Asset Absolute Return Strategy
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