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Luc de la Durantaye, chief strategist and chief investment officer for CIBC Asset Management.
It’s fascinating. I think when we look at currency, we need to start with the U.S. dollar outlook. And from there, we can get a sense of how other currencies will fare. The U.S. dollar starts from one of the more overvalued currencies in a large currency universe of about 35 currencies that we follow. With that, also, what used to hold up the value of the U.S. dollar was its interest rate advantage. With the pandemic, it lost its interest rate advantage now that interest rates at zero in the U.S. They’re zero pretty much around the G7 countries. So if the U.S. lost its interest rate advantage, that’s the second point.
The third point is more of a fiscal and current account. The U.S. is running a very large budget deficit and a very large and growing current account deficit. That also puts downward pressure on that currency. To finalize, the whole case against the U.S. dollar is in the longer term, we see a shift in the usage of U.S. dollar globally. The U.S. dollar remains a large and what we call a reserve currency, but the use of the U.S. dollar is in constant decline and will continue, in our view, to continue to decline.
One of the aspects of that, for example, is that the U.S. has been using the U.S. dollar — they’ve weaponized the U.S. dollar. They’ve used the U.S. dollar to impose sanctions on a number of countries like in Russia, for example, and Iran. That woke up a number of countries to say, “Wait a minute. I’m at risk. If I hold U.S. dollar, or if I transact in U.S. dollar, I might be hit by sanctions from the U.S. administration.” And that has started, also— among other things, that has started, also, a shift away from the U.S. dollar. So all of that brings headwinds to the value of the U.S. dollar over the cyclical outlook and also the more longer term secular outlook.
When you start with that, then you look, OK, so which currencies are most attractive relative to that? As a Canadian, as I invest abroad, while the U.S. dollar is one place that is prominent in investors’ portfolios: when you invest in global equities, more than 55% is in U.S. dollar; when you invest in global bonds, about a third is invested in the U.S. dollar.
We would recommend to Canadian investors to look thoroughly at what is their U.S. dollar exposure, and to make sure that they’re comfortable with the amount of U.S. dollar they have in their portfolio. Because there’s that underlying sort of weakness that we see coming over the cyclical horizon, but also a longer term horizon. In exchange, the Canadian dollar in our universe fits a little bit in the middle of our universe. It’s undervalued versus the U.S. dollar and, therefore, our outlook for the Canadian dollar is for further smaller gains relative to the U.S. dollar. That’s in the context of, like I said, the broad U.S. dollar decline that we anticipate.
But Canada continues to have certain challenges from, for example, oil. We’re a high-cost producer. So oil and ESG-type restrictions that are growing in the investment community makes the oil investment in Canada a bit more of a drag than a support over the years. But nevertheless, as we do sort of see a continued recovery in the next 12 months in the global economy, then Canadian economy benefiting from being a cyclical currency should continue also to benefit from that. So we’re in areas of about 76 cents for the Canadian dollar, as we speak. We would see 78, potentially, in the shorter term, and potentially in the longer term, in a year from now, 80 cents is not impossible in terms of target for the Canadian dollar.
Finally, if we were to look briefly at where else can a Canadian investor look to invest and whether that would be supported by appreciating currencies, some of the higher quality emerging currencies are interesting. Asia has managed the pandemic much better than Europe or North America. They’re coming out of it stronger and they boast higher interest rates and better cyclical growth outlook. So exposure to some of the Asian currencies would be probably profitable. So we’re talking about the Chinese renminbi, talking about the Indian rupee, Indonesia rupiah: those types of higher-carry, higher-interest providing, and more undervalued currencies around the world would be also a good complement to a folio.