(Runtime: 3 min, 36 sec; size: 2.19 MB)
Luc de la Durantaye, Chief Investment Strategist and CIO for CIBC Asset Management.
When we look at currencies and particularly the Canadian dollar/U.S. dollar exchange rate, the elements that are truly influencing the movement of this currency pair, we traditionally see valuation and valuation at the present level. The Canadian dollar is somewhat undervalued versus the U.S. dollar to about 10% — 8% to 10% undervalued — which is not very large, number one. And number two, the Canadian economy still has a current account deficit, and so we need a weaker dollar or an undervalued Canadian dollar to improve our deficit. So that’s not a big supporter of a stronger Canadian dollar.
When we look at the monetary policy differential, we don’t see a lot of difference between the Federal Reserve and the Bank of Canada coming into 2020. Both central banks are likely to be on the sideline for most of the year, so we don’t see that as a big swing factor in the currency exchange rate.
And then thirdly is the relative cyclical aspect of both economies. Canada really has somewhat outperformed the U.S. economy in 2019, and we would tend to think that we will have a bit of a reversal of that in 2020. Certainly the Canadian economy has finished the fourth quarter 2019 in a weak zone. Retail sales, if we can think of retail sales, they’ve been relatively weak and so that element as well doesn’t provide a big strength for the Canadian dollar.
I think what could push the Canadian dollar stronger, which it has been in late last year, early this year, is actually when you flip the equation around where we’ve seen a generally weak U.S. dollar across the board. And so the Canadian dollar has sort of benefited from a generally weak U.S. dollar versus the Canadian dollar. We don’t see the U.S. dollar being much weaker from here. So that that leads us to more of a trading range for the Canadian dollar, and we would probably be at the high end of the trading range in terms of strength for the Canadian dollar: 76 cents, 77 cents and a bottom of the range somewhere around 75 cents would be our take at least for the time being.
So from a Canadian investors’ perspective, one has to think that investing abroad is not a big hurdle, and we don’t see a lot of risk in the sense that we don’t see the Canadian dollar being very strong in 2020. Therefore, currency losses for a Canadian investor investing abroad, we don’t see a major risk there.