The big picture the question is: Will we return to a 2010s style regime of low inflation and low rates? Last week's CPI data showed that we are and I think that's a big tailwind for all risk assets. The focus right now is on central banks but waiting longer to cut rates probably won't be bullish for risk-sensitive currencies because headwinds are mounting, particularly due to housing and immigration.
- The Canadian dollar is weaker today after China’s central bank left rates unchanged. It will be tough for the commodity currencies to gain any traction without a renewed push for growth in China.
- For 2024, there are some short-term tailwinds for the Canadian dollar as central banks cut rates and the US dollar falls broadly.
- Eyes are on the spring Canadian housing market. If there are a flood of listings, then we could see another leg down in prices. I think it might take some time for the broader market – and the Bank of Canada – to recognize that pain (or resilience) so there could be an opportunity there.
- Longer-term, I’m watching anti-immigration sentiment grow. That’s been the key source of GDP growth for Canada in the last decade and it increasingly looks like it won’t be in the future. It’s not just Canada either; in December Australia announced it was cutting immigration in half. I don’t think it’s out of the question that Canada does the same, either before or after an election. If the flow of people to the developed world stops, that could change the entire growth and inflation dynamic. I'm not betting on it yet but it's something to watch closely.
- Globally, there is a mountain of money stashed in short-term high-yielding USD assets. That money will flow out and it will be a drag on the dollar. Already we’re seeing some flows into emerging markets (Mexican peso should have another good year) and I think the yen will be a winner this year as well (Nikkei with a very strong start to the year and another gain today).
