Market and Investment Insights

October 2019

Interest Rate Movements & Canadian Dollar Growth

Progress in trade talks continued this month between negotiators representing the U.S. and China. Representatives from the two countries appear to have reached an agreement on a ‘Phase 1’ deal, which primarily includes a pause on future tariff hikes in exchange for increased purchases of U.S. and Chinese goods. The announcement appeared to lessen some of the pessimism in the market and investor sentiment improved.

The Bank of Canada announced its intent to leave benchmark interest rates unchanged. This decision was initiated on the basis that the Bank is forecasting a slowing of GDP growth to 1.6% in 2020. According to the Bank, this base case is attainable without further rate cuts and is not detrimental to future Canadian economic growth. Contrary to this, the U.S. Federal Reserve cut its policy benchmark rate by 0.25%. Chairman Jerome Powell made it clear that this reduction was an intention to lessen market expectations of any further cuts and to show optimism about the state of the U.S. economy.

The loonie rallied 2% against the U.S. dollar throughout the month bolstered by robust domestic jobs data and investor optimism that a U.S.-China deal could strengthen Canada’s overall commodity-linked economy. The exchange rate between the U.S. and Canada has historically been closely linked to each country’s central bank policy on interest rates and the market price of West Texas Intermediate Oil (WTI). WTI rallied over the past month, producing a notable impact on the loonie’s gains.

Internationally, Hong Kong has slipped into a recession, an after-effect compounded from the ongoing protests and trade war. These socioeconomic issues have been dragging on the economy, resulting in the Hong Kong economy slowing down 3.2%.

Contributors to Returns:

  • PIMCO Monthly Income picked up again during the month via exposure to emerging markets and securitized debt. The fund’s currency exposure was also a contributing factor to positive performance.
  • ARKK Innovation ETF outperformed as market sentiment improved, and investors moved back into higher risk-return stocks.

Detractors to Return:

  • Colliers International missed on revenue expectations, due to being impacted by margin compression in the international business.
  • Vanguard Canadian Aggregate Bond retracted slightly as rates moved up in markets as investors reduced expectations of future rate cuts. The fund was negatively impacted by its longer effective duration of bonds it holds.

All performance numbers sourced from Morningstar Direct.