The dollar

RYAN  By Guest Blogger Ryan Lewenza

One of the key aspects of financial analysis is to determine and isolate the main drivers of a specific asset class. For equities it’s earnings and valuations. For bonds it’s inflation and interest rates. For the Canadian dollar it’s oil prices and the interest rate differential between Canadian and US bond yields. What do these factors portend for the Canadian dollar in 2018?

First let’s start with the outlook for interest rates in Canada and the US. This week we saw the Bank of Canada hike rates by 25 bps to 1.25% – the third hike in a year. They did this in response to the strength seen in the economy which grew at over 3% and added 423,000 jobs in 2017.

I see the US economy growing above 3% this year driven by a strong consumer and the recent US tax reform which could provide an additional boost to their economy. For Canada I see slower growth of roughly 2.5% as higher interest rates weigh on consumer spending and uncertainty over NAFTA weighs on businesses and exports.

Given this outlook I see the Fed hiking rates at a faster clip than the BoC which has implications for our dollar.

Fed and BoC Overnight Rates

Source: Bloomberg, Turner Investments

Below I illustrate why this matters. In the chart I show the strong relationship between the Canadian dollar and the interest rate differential between Canadian and US bond yields. Since 2014 there has been a near perfect correlation between these two. Put simply, as the Fed hikes rates faster than the BoC this year, US bond yields should move higher relative to Canadian bond yields, which would be negative for the Canadian dollar.

Interest Rate Differential and CAD/USD

Source: Bloomberg, Turner Investments

The second key driver of the Canadian dollar is commodity prices and, in particular, oil prices. I’ve been bullish on oil prices over the last year and I see more upside. I’m targeting WTI to close the year at US$66/bl. If I’m correct this would be bullish for the Canadian dollar.

So of the two key drivers for the Canadian dollar, one is bearish (interest rate differential) and one is bullish (oil prices).

Another tool we can look at to help determine the direction of the Canadian dollar is my financial model for the dollar, which uses current oil prices and interest rates to determine “fair value”. Based on these inputs and current levels, this suggests a fair value of 81 cents. With the dollar currently at 80 cents the model suggests limited upside from here.

CAD Model Points to Fair Value at 81 Cents

Source: Bloomberg, Turner Investments

Finally, we need to see what the technicals look like for the Canadian dollar so we have the complete picture. The Canadian dollar has improved technically over the last year with the CAD now above its rising 200-day moving average. However, it remains trapped in a clear trading range of roughly 74 cents to 84 cents. We would need to see the Canadian dollar breakout from this range before we would be willing to change our outlook.

CAD in a Technical Range

Source:, Turner Investments

Putting this analysis together, I see the Canadian dollar trading range bound this year as higher oil prices potentially push up the exchange rate at times, and the rate differential favouring US bond yields pushes it lower at times.

This long and boring analysis points to a boring trading year for the Canadian dollar where our client portfolios are neither negatively impacted by a higher Canadian dollar, nor benefit from a materially weaker Canadian dollar.

Ryan Lewenza, CFA,CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.


The leap

Photo by Andy Seliverstoff

People with wasted lives who follow social media and (ugh) blogs were scandalized a few days ago when a Toronto rowhouse which deserves to be burned hit the market for $750,000. Yes, it’s in an area favoured by trendoids and hipsters, guys with beards and buns and women wearing tats but, sheesh, three-quarters of a mill for a place with a kitchen like this?

If the house sells, according to the Tweets and posts, it will ‘prove’ the local market has resiliency and duration, that a piffle like rising mortgage rates or a stress test cannot stop it. This place is an utter, complete, unqualified, horrific, likely diseased, dump. Makes you wonder if the people on either side of space a local real estate site called a “howling shithole”, know what’s but a few inches away.

Anyway, let’s all celebrate the grandly-named Allister John Sinclair, the listing agent from Re/Max, who put pen to paper and came up with a glowing description. I think a Pulitzer is in order, or certainly a Governor-General’s award for fiction:

Builders Delight Perched In The Highly Desired Neighbourhood Of Trinity Bellwoods! Attention Renovators & Builders! 9 Foot Ceilings. This 2 Storey Home Just Needs Tlc, Renovations And Remodeling To Become Your Dream Home! Just Steps To Queen Street, Trinity Bellwoods Park, Ttc, Subway, Shops And So Much More. Prime Location! Don’t Miss This Opportunity! **** EXTRAS **** Property Being Sold As Is Where Is, Street Permit Parking Available, Roof Is In Good Condition. Upgraded Furnace – Recently Serviced With New Heat Exchanger And Motor. Hot WaterTank (Rental – 2016)

As of Friday afternoon it was still on the market – not yet picked off by some smarty moister with a B of Mom loan and an e-bike. Maybe there’s hope after all. BTW, here is the listing for 15 Rebecca. Please be responsible, and don goggles and other protective gear before you click on the link.

Well, there’ll be serious discussion over the next two weeks about the direction of the market as a whole. Despite sliding detached prices in Vancouver the natives seem convinced things are just ducky, unless Comrade Horgan, the new NDP premier, comes down with a vicious new anti-speculation law in his February budget. He’s rejected an outright ban on non-locals owning property, which is entirely correct and reasonable, but he’s only in power thanks to the Greens, whose leader is a flaming xenophobe. So, we’ll see. The combination of the existing anti-Chinese tax, the empty houses tax and a new spec tax – plus higher mortgage rates and B20 – should be enough to finish off YVR.

Toronto’s a more interesting case, since what happens here will impact about 8 million people in the GTA and its commutershed. The big news will come about February 5th, when the realtor-gathered sales numbers for January are released. If they suck, you can pretty much write off the next two or three months as market sentiment runs negative. Already homeowners believe conditions are worsening thanks to interest rates while buyers are stressed over the stress test. It’s a perfect storm as banks pull in their horns and credit is seriously restricted.

But if the January numbers are close to those of last year (5,188 transactions, of which 2,261 were detached) and if the HS at 15 Rebecca finds a buyer, the bubble will continue to inflate – certainly leading to a more catastrophic outcome down the road.

And where are we now?

As reported the other day on this blog by a veteran broker, a mere 77 detached houses found buyers in 416 in the first couple of weeks in January. Bad. Now Zoocasa has some new numbers. Also bad. So far condo sales are down 21% year/year and 20% lower for detacheds. This has created a buyer’s market, as the ratio of sales to listings plunges below the 40% mark – in stark contrast to early last year when it oscillated between 90% and 100%.

The ratio now is somewhat shocking: 24% for detached houses and 26% for condos. It means as new listings flood in for spring, buyers will probably have a large and growing pool to choose from.

But these aren’t ‘official’ numbers. The weather was appalling after Christmas. News about the mortgage changes are rate hikes was everywhere. And two weeks do not a market make – that’s too big a leap to take. But there’s no denying the cost of money has shot higher than anyone expected a year ago. The new borrowing rules are, by historic measure, extreme. Tens of thousands of potential buyers will not be approved. As many more will qualify to borrow less. If listings swell as they do every March and April, peak house will truly be over.

Meanwhile, some deluded kid will buy the horror on Rebecca. Pray for her.