Global Investment Outlook - Spring 2018
April 3, 2018
INVESTMENT OUTLOOK Summer 2018 - Transcript How have recent events, such as NAFTA negotiations and rising oil prices, shaped your views on the Canadian dollar?
Dan Mitchell: Well, if you just look at the Canadian dollar, you might think it's been pretty quiet in Foreign Exchange Markets. That certainly hasn't been the case. We've seen a rise in U.S. dollar and higher U.S. Treasury yields cause a lot of pain in some other currencies, particularly in Emerging Markets. So, simply by trading sideways, the Canadian dollar has outperformed. It's outperformed the Euro, the Yen, the British Pound. And I think the sideways price action in dollar CAD, really reflects tension between some shorter-term and longer-term elements, in the Foreign Exchange Markets. Daniel Mitchell: Under one hand you've got high oil prices and you've got NAFTA optimism that are supporting the currency. Every time Chrystia Freeland flies down to Washington, we see hope return that a positive deal might come out of that negotiation, and that benefits the currency. But the other way to look at it is that, without those short-term positive influences, the Canadian dollar would surely be trading weaker. And that's what the reflection of some of the growth headwinds and economic growth in Canada. Daniel Mitchell: We have consumers not being able to spend at the same pace they've been spending. Canadian businesses are choosing to invest elsewhere. And our Exports are losing market share in the Global Goods Markets. So, we think that the Canadian dollar will continue to underperform, trading to the lower end of the range down to 1.35, which is our one-year forecast. What is the impact of a U.S.-China trade war on inflammation, currencies and interest rates? Dagmara Fijalkowski: Trade wars has been all over the news lately, and particularly focuses on China-U.S. trade negotiations. The current White House has been putting a lot of pressure on Chinese trade practices, initially started with tariffs on aluminium and steel and then a whole host of other products. The trick is to put pressure on Chinese trade practices, without hurting American consumers, and that's what the market started worrying about, about potentially impact of that with the negotiations on inflation and interest rates. Dagmara Fijalkowski: Last week, we had a few stories that suggested that China is willing to accommodate U.S. demands by decreasing its annual trade surplus from $350 billion per year to $200 billion. Later, these stories have not been confirmed, but in this particular case, we think that, where there is smoke, there is fire. That's because we look at these trade tabulations in the context of longer-term Chinese objectives. President Xi's objectives are for China's ascendency, in the political and economic global sphere, and that includes ascendency of Chinese currency, the objective is for Renminbi, internationalization and that means when it comes to its role in the international payment systems, international reserves, and international capital markets. And to that, and China for example in 2015, pushed for inclusion of Renminbi in the Special Growing Unions. Dagmara Fijalkowski: And more recently, started opening its Equity and Bond Markets to foreign investors. This is a part of longer-term masterplan. That plan includes opening Chinese asset markets gradually to foreign investors, which would allow, for, offsetting liberalization of outflows from China. Chinese Nationals wants to be able to invest globally, but that would be disruptive to the currency and Chinese Government is trying to create offsetting interest from foreign inflows in Chinese markets. That's happening, as I said, in a gradual fashion. Dagmara Fijalkowski: That's why they're likely to be patient, and they are actually in a unique position versus other governments, because of their massive role in their economy, to accommodate American demands. For example, by substituting Imports from other countries. We import from the U.S., think about American Soybean for Brazilian soybean or Boeing for Airbus... And that's why, when we think about the possibility of a full-blown trade wars, this is not our best-case scenario. We think that we'll figure out a way to accommodate these demands and find satisfying solutions. Disclaimer This report has been provided by RBC Global Asset Management (RBC GAM) for informational purposes only and may not be reproduced, distributed or published without the written consent of RBC Global Asset Management Inc. (RBC GAM Inc.). In Canada, this report is provided by RBC GAM Inc. (including Phillips, Hager & North Investment Management). 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Used under licence. © RBC Global Asset Management Inc. 2018 Publication date: June 2018