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Stronger loonie may make it worth your while to buy U.S. dollars, Adam Mayers writes
Canada’s central banker Stephen Poloz made a speech in Charlottetown this week where he highlighted good news for the Canadian economy.
January’s interest rate cut, which sent the dollar sharply lower, helped offset the impact of lower oil prices. The oil-price shock has been short and sharp, but the economy has largely been able to shake it off. A year from now we’ll be firing on all cylinders.
That’s in sharp contrast to January, when the outlook looked grim. Oil’s quick collapse was going to hurt everyone and take jobs, real estate and good times down with it.
It is example of how quickly things can change and a good illustration of why it pays to take predictions with a grain of salt. We love predictions because they offer the illusion of certainty. But as Nobel physicist Nils Bohr once said, tongue in check, “Prediction is very difficult, especially if it’s about the future.”
There’s a couple of take-aways from Poloz’s update and other recent economic news.
The first is that if you have a mortgage coming due, or are sitting with a floating rate, it may be time to lock in. Or at least put it on your watch list. Ontario’s largest credit union, Meridian, is teasing home buyers with a low of 1.49 per cent for an 18-month term for those in five-star financial health. The top fixed rate for a five-year term is 2.49 per cent.
Those sorts of deals aren’t likely to be here a year from now. That’s because an economy “coming home” — Poloz’s folksy term for strong growth — means higher inflation. Inflation is already running at the high end of his 2 per cent target and has nowhere to go but up. Up, means interest rate increases, which some economists see this coming before the end of the year.
The other thing to consider is that now may be the time to buy U.S. dollars. If you’re travelling to the U.S. later this year, are a snowbird, or own a U.S. property, today’s higher exchange rate may be temporary.
The dollar has recovered some of the ground it lost this winter. This is because oil prices have rebounded and our currency is seen as linked to oil and energy. But the rise in oil may be temporary and if it falls again so will our currency.
The dollar started the year at 88 cents U.S. which became 78 cents after the rate cut. This week it was back to 82 cents U.S. on the oil price rebound and the message that more interest rate cuts are unlikely.
Economists are now calling for something between 77 and 80 cents by the fall. The difference can be significant. At 82 cents, $1,000 U.S. costs $1,220 Canadian. At 77 cents U.S., it costs $1,299.
On the subject of predictions here’s a couple that haven’t turned out:
The GTA real estate market was supposed to slow dramatically this year — an annual prediction for the past decade. Realtors ReMax and Royal LePage saw 4- to 4.5-per-cent gains in 2015.
So far, prices are up 10 per cent year-over-year, based on April’s figures. Part of the fuel has been Poloz’s interest rate cut.
The consensus in January was that U.S. stocks would be the place to be in 2015. The American economy was gathering momentum and profits were rising.
Year-to-date the S&P 500 index, a broad measure of U.S. market behaviour, is up 4 per cent. The S&P/TSX is up just 3 per cent. Europe and Asia have been the place to be. Stoxx Europe 600, a basket of the largest European companies, is up 16 per cent year-to-date (with Russia the best performer) and the Dow’s Asia-Pacific Index is up 11 per cent.
When it comes to investments and the economy there’s always some sort of surprise. The trick is to have a plan and stick to it. That way when things change, the noise escalates and the fear factor rises you have some context and a point of reference. And remember, a forecaster is not smarter than everyone else. He merely has his ignorance better organized.
Or so the saying goes. Adam Mayers writes about investing and personal finance on Tuesdays and Thursdays. Reach him at amayers@thestar.ca @adammayers_pf