Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking about the direction of the U.S. dollar with Jules Boudreau, senior economist with Mackenzie Investments. We talked about implications for the Canadian economy, and we started by asking what explains the U.S. dollar’s strength in 2024.
Jules Boudreau (JB): The U.S. dollar’s strength, especially against the Canadian dollar, can be broken down into two periods: pre-Trump and post-Trump. So, if we look at the start of the year, the U.S. dollar mostly performed well because the U.S. economy was performing well, relative to other global economies. The second reason, which is a little bit of a corollary, is that interest rates have stayed higher in the U.S. than in other countries. Now if we look in the post-Trump period, when the odds of a Trump presidency started rising, that strength that we saw in the U.S. dollar is due to a few things. First, the threat of tariffs. That will tend to appreciate the U.S. dollar. We also see promises of lower corporate tax rates in the U.S. That’s also pro-U.S. dollar. There’s also, probably, a higher deficit spending that we’ll see in the U.S. Higher spending in the short term means higher inflation, higher growth and higher interest rates. All these things mean higher dollar. So, both pre-Trump and post-Trump, we’ve seen a pro-U.S. dollar forces.
What is in store for the Canadian dollar
JB: A lot of the U.S. dollar’s strong performance due to a Trump presidency has been priced in at this point. But I would say that in the case of the U.S. dollar-Canadian dollar exchange rate, we do see further upside. So further appreciation in the U.S. dollar. Part of that is from the Trump presidency, especially the tariffs. We think Canada won’t be able to avoid the tariffs that Trump is planning to put on even his allies. That definitely means a stronger U.S. dollar and a weaker Canadian dollar. And I would say that we want a weaker Canadian dollar in the face of tariffs. It’s one of the ways we can absorb the shock of the tariffs. These floating exchange rates act as lubricants in the global economy. Tariffs would also force the Bank of Canada to cut rates even more than what it was already expecting to do. We expect the Bank of Canada to cut rates all the way down to 2% — which is much higher than where the U.S. Federal Reserve will bring interest rates; we’re more expecting 3.5% in the U.S. — and so that spread between the Canadian interest rates and U.S. interest rates would also mean a little bit more upside in the U.S. dollar versus Canadian dollar in 2025.
Canadian reaction to the current strong U.S. dollar
JB: Canadian investors have benefited a lot from the rise of the U.S. dollar over the past five years. The U.S. dollar has appreciated versus the Canadian dollar, and that means that any Canadian investor that has been holding U.S. assets has benefited. And I’d say that this exposure to The U.S. dollar is a privilege that Canadian investors have, because there is an inverse correlation between the performance of markets and the performance of the U.S. dollar in general, on average. So, on average, when markets go up, the U.S. dollar will tend to go down, and when markets go down, the U.S. dollar will tend to go up. And that’s why Canadian investor should always, or almost always, hold a lot of U.S. dollar in their portfolio. They shouldn’t fully hedge their investment portfolio. They can partly hedge it and maybe now is a good time to do it, and that’s something that a sophisticated asset manager can do. But in general, you always want to keep some exposure to the U.S. dollar because it has this magic property of diversification.
And finally, what’s the key takeaway on currency fluctuations
JB: We need to realize that currency exposure is a big driver of portfolio performance, and that, unfortunately, it’s very hard for the average investor, typical investor, or even an advisor, to directly, themselves, play around with the currency exposure in their portfolios. And that’s why, in general, you want to have access to sophisticated portfolio managers, either macro portfolio managers or allocation portfolio managers that can make that decision for you, of saying, ‘OK, we want to have a little bit of U.S. dollars —always. But maybe now we don’t want to have 100% of it.’ So, the key takeaway to me is that, realize that you have these exposures, and do business with managers that are able to take advantage of the particularities of the currency markets.
Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Jules Boudreau of Mackenzie Investments. Visit us at investmentexecutive.com where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.
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