Baig says that if the Bank of Canada decides that the impacts on unemployment and GDP growth are more severe than the pressure on inflation, they may cut rates and that would signal a drop in CAD. He notes, though, that the BoC has made no noise to that effect so far. He also notes, however, that the significant investments by the Federal government in realigning Canadian trade, ports, and infrastructure away from US-reliance, could be supportive for CAD and ultimately mean the Canadian dollar rises against the USD. Moreover, if the trade war means a revision in the favourable treatment of Canadian investors by US securities regulators, then some of the roughly $3 trillion Canadians currently invest in US assets could come back home, which Baig says would further support CAD.
Grappling with uncertainty
Baig, Johnson, and Thiru all emphasized just how uncertain things are at the moment, stressing how that uncertainty has markets reacting less than they otherwise might. Johnson and Thiru stress that so much of this uncertainty seems to be driven by a US administration that doesn’t really know what it wants. Thiru notes that for all the rhetoric about a trade deficit with Canada, excepting hydrocarbons and fertilizers the US actually has a trade surplus. However, none of the tariffs are impacting energy and fertilizers from Canada. Thiru and Johnson believe that there is more of a desire to simply ‘win a fight’ by the US administration here. The inherent ambiguity of that goal, however, makes predicting outcomes incredibly difficult.
What Johnson expects, however, is that the yield curve should steepen somewhat amid all this uncertainty. He expects the Bank of Canada to remain on hold while economic support comes from fiscal policy, which should result in more borrowing and more future inflation, causing that curve to steepen. Corporate credit, he adds, should be more reflective of stock market risk and the TSX’s relative insulation from trade risks should be supportive for credit. Overall, Johnson and Thiru are of the view that a steady hand is more likely to see clients through this mess.
“Overanalyzing this thing and trying to pivot the portfolio will drive you crazy,” Thiru says. “When you have a problem, there are certain things you can control, certain things you can’t. The cards are going to fall where they fall and we just have to play them.”
“Keep calm, carry on,” Johnson adds.
