Avoid the dollar. Which one? Both of them

Jules Boudreau, MA, CFA
Senior Economist, Mackenzie Multi-Asset Strategies Team


  • The Canadian economy has begun softening, and will continue to do so in 2024, leaving the Canadian dollar vulnerable.
  • Even though the US economy is much more robust, the US dollar’s future is not much brighter, given its priciness relative to its long-term fair value.
  • A sophisticated multi-asset investor need not be confined to choosing between CAD and USD. Other currencies have more attractive prospects.

The softening Canadian economy will be a headwind to the Canadian dollar in coming quarters. As we covered in last month’s commentary, we think the Bank of Canada (BoC) is done hiking. In its October Monetary Policy Report, the BoC slashed growth projections for the Canadian economy. For the first time since inflation picked up in the second half of 2021, the BoC estimates that the output gap is around neutral, which is to say the Canadian economy is back into balance. The BoC’s forecasts have been especially inaccurate in the post-pandemic period, but this time we agree with their expectation of a slowdown.

The outlines of a slowdown are emerging in Canada, while the US still looks rock solid

Trends in economic indicators, Canada vs. US

Table: Canada, GDP, housing & construction down. Employment, inflation & retail sales unchanged. US: GDP, Retail sales, housing & inflation up, employment unchanged.
Source: Bloomberg, Mackenzie Multi-Asset Strategies Team. Indicators used to compute trends for each row: GDP and Consensus Economics GDP forecast (“Gross domestic product (GDP)”; employment rate 25-54, employment and unemployment rate (“Employment”); real retail sales (“Retail sales”); housing starts and house sales (“Housing and construction”); CPI, trim CPI, median CPI and Consensus Economics inflation forecast for Canada, CPI, core CPI  and Consensus Economics inflation forecast for the US (“Inflation”). We use an average of one-month and three-month trend, expect for GDP, where we use most recent quarter’s growth.


While the BoC is likely done hiking, we don’t expect rate cuts any time soon. The BoC will be tiptoeing on the 5% tightrope for a couple quarters. Growth and employment data will be too soft to justify hikes, but inflation data will remain too hot to allow for cuts.

Rate cuts in advance of other developed economies would be a clear catalyst for Canadian dollar depreciation. Because we see low odds of cuts in Canada, we’re not positioning for a collapse in the loonie’s value. But we do expect it to weaken against most global currencies. In our Global Macro Fund’s universe of twenty-three currencies, CAD is among the ones we like the least.

Speaking of currencies we like the least, the US dollar is also near the bottom of the pack. The US economy is on better footing than the Canadian economy. Evidence of softening economic data is sparse, fiscal policy will remain expansionary and business investment is solid. We even expect the US Federal Reserve to hike to 5.25% in the coming months, a non-consensus view which would be supportive for the US dollar’s value. But even if the macro backdrop is constructive for the US dollar, the currency is simply too expensive.

The US dollar remains expensive against other global currencies

US dollar real effective exchange rate, deviation vs. historical average

Chart: US dollar real effective exchange rate, deviation from historical average is currently +17%.

Source: Bloomberg

Fair value must always be an anchor when investing in currencies. Suppose a stock has great growth prospects but is trading at a price-earnings ratio of 40. Would you buy it? Likely not. An investor shouldn’t ignore valuation in equities, regardless of the fundamentals, and the same principle holds for FX.

The US dollar is currently severely overvalued relative to other currencies, while the Canadian economy’s prospects are uniquely dim. Those two forces more or less cancel out and leave us without a strong preference for one currency over the other. Luckily, we aren’t restricted to those two currencies. In our Mackenzie Global Macro Fund, we regularly take positions in twenty-three different currencies, with the possibility of taking positions in others outside of that universe if we sense an opportunity.

The US dollar is the most overvalued of all advanced economy currencies

Long-term fair value vs. US dollar

Chart: Loonie 10.3% below long-term fair value vs. USD. GBP, -11.2%; NZD, -16.4%; AUD,-20.5%; Euro,-20.6%; SEK, -29.4%; JPY, -35.6%; NOK, -40.1%.
Source: Calculation by Mackenzie Multi-Asset Strategies Team.

One of the long-running themes in our currency positioning is our fondness for Latin American currencies.
After a few rough years at the end of the 2010s, and a major negative shock in 2020, LatAm currencies were left extremely cheap. Then, in 2021, LatAm countries’ macro profiles began brightening noticeably. A surge in demand for commodities helped right-size their external balances. And their central banks started hiking rates well in advance of those of richer countries. Brazilian rates were up to 10.75% when the Federal Reserve began hiking in March 2022.

Fast forward a few years, and we still like LatAm currencies. But we’ve reduced the size of our positions on that front. While interest rates are still high and balances of payments haven’t deteriorated, LatAm currencies are not dirt cheap anymore. That tends to happen when currencies appreciate at double digit rates, like most LatAm currencies have over the past couple years. These days, we particularly like the Colombian peso, but our long-standing flings with the Mexican peso and Brazilian real are still going strong. We prefer LatAm currencies to EM Asian currencies, especially the Philippine peso and Thai baht, commodity exporters whose external balances have severely deteriorated over the past few years.

In the G5 space, we like the Japanese yen’s prospects as a defensive currency. It pairs well with our LatAm longs, pro-growth currencies with high interest rates. In contrast, the Japanese yen has suffered in the ongoing global inflationary boom, leaving it severely undervalued relative to its long-term fundamentals. In our view, in the case of a global economic slowdown — not our base case, but still a possibility — the yen would be one of the best assets to own in a portfolio. Diversification is key, even in currencies!

Capital markets update

What we’ll be watching in November

November 14: US October CPI inflation

  • US inflation came in above target in September and is showing clear signs of sticking above 2%. CPI components in the “services” category, which include rent, travel and restaurants, contributed 4% to total month-on-month inflation.
  • Absent a slowdown in the US economy — of which we see no trace of in the economic data — it is difficult to forecast a drop in inflation towards the Fed’s 2% target.

November 15: US October retail sales

  • The one-two punch of CPI and retail sales on back-to-back days will be sure to rock markets in mid-November.
  • September retail sales data blew past expectations (+0.7% vs. +0.3% expected by consensus). Credit card data from big US banks suggests healthy, but slower, growth in retail sales in October (+0.3% based on our in-house model).

November 30: Canada third quarter GDP

  • Canada could enter a technical recession if GDP is shown to have contracted in the third quarter following a -0.2% seasonally adjusted dip in the second quarter.
  • We expect Canada to enter a recession as the Bank of Canada’s June and July rate hikes have a disproportionately large cooling effect on the Canadian economy.

Emerging theme: China’s economy is stabilizing, but not bouncing

Recent economic data suggests China’s Q2 downturn likely bottomed out in July, and that the economy has been stabilizing. GDP data for Q3 was better than expected, while retail sales and industrial production bounced in September. Consumer prices have exited deflationary territory over the past few months. New loan creation seems to have stabilized at around 20% of GDP annualized, a strong enough pace to keep the Chinese economy from entering a more acute downturn.

Most encouraging are signs that Chinese leadership is ready to take steps to extend support to struggling households. Since September, it unveiled programs for down payment support and a debt swap mechanism to ease pressure on over-leveraged local governments.

The Chinese government recently announced a one trillion yuan ($137 billion) stimulus package to lift the economy out of deflationary territory. This will cause the central government’s budget deficit to exceed the informal limit of 3% of GDP. This willingness by the central government to ramp up borrowing is a great sign for the economy’s short-term prospects. One of the main macro problems in China is that debt is hiding in all the wrong places. While homebuilders and local governments are up to the neck in bad debt, the central government’s balance sheet is squeaky clean.

China won’t get back to the high-single-digit growth rates it experienced in the 2000s and early 2010s. New infrastructure investments are unproductive after years of overbuilding, and gains through exports will be tougher to come by. The government’s best bet to return to growth is to encourage household consumption, instead of following its old policy of transferring income from households to exporters. We don’t expect such a major policy shift without a change in leadership. But a stabilization of domestic growth is likely. And a stabilization is all China-linked assets need to rally from their depressed valuations. 

Chinese GDP came in above expectations in Q3, is now in line to hit growth target

Chart: China’s quarter-over-quarter GDP growth fell below the government’s 5% target in Q2 2023 but is expected to rebound to 5.3% in Q3.
Source: Bloomberg

Multi-Asset Strategies Team’s investment views

Tactical summary

Stocks: underweight. Sovereign bonds, underweight. US stocks, underweight. USD, neutral. Euro, overweight. UK pound, neutral. Yen, overweight.
Source: Mackenzie Investments
Note: The views expressed in this piece apply to products that are actively managed by the Multi-Asset Strategies Team.

Positioning highlights

Underweight equity: Our overarching macro view is that of a “delayed landing” for the rest of 2023: resilient growth (no recession in the US), sticky inflation, and higher for longer rates. Momentum of growth in the US is strong, with employment, investment and industrial production all showing resiliency over the past few months. A “no landing” scenario is both good and bad for stocks: financial conditions will tighten, putting pressure on valuations, but (nominal) company fundamentals should remain solid. On net, we’re moderately underweight stocks, as we think negative sentiment and tightening financial conditions will outweigh the tailwind from decent company fundamentals. We have a slight preference for international stocks in the equity mix. US stocks are more expensive after the recent AI-driven rally, and international stocks should benefit from solid nominal economic growth and a stabilization of Chinese growth.

Underweight bonds: In our base case of a sustained, fiscally driven overheating of the US economy, inflation in the US will be sticky, and will stay well-above target for the rest of 2023 and most of 2024. We do like certain pockets of fixed income on a relative basis, such as short-term Canadian government bonds and German bunds. But we remain underweight bonds in general.

Commodity-exporting EM currencies: Commodity-exporting EMs are well situated to outperform in this macro environment. Their budgetary and external balances have improved due to high global nominal growth and high commodity prices. Their central banks started raising rates much earlier than the rest of the world. As a result, they have generally reached the end of their tightening cycle, reducing the risk of overtightening into a recession. But the level of rates remains high, offering positive carry over most other currencies. On the other hand, we have a negative view on the currencies of Asian EM countries. Their external positions have severely deteriorated, and their interest rates are relatively low.

Oil market tightness: The physical oil market is currently very tight, especially with the ongoing one-million-barrel-per-day Saudi production cut. In the absence of a global recession, which we don’t expect to occur anytime soon given the positive momentum in the US and the expansionary deficits from governments around the world, oil should remain undersupplied. Positioning is also constructive for the oil complex. For much of 2023, investors were expressing recession bets through short oil derivatives positions. These bets have started to come off, with room to run.

Japan policy divergence: The Bank of Japan widened the tolerance around its 10-year yield target by 25bps back in December, and by an additional 50bps in July 2023. With the yen severely undervalued and core inflation rising quickly, the BoJ could take more steps towards tightening in 2023, sending rates higher. We overweight the Japanese yen in our funds, and dislike Japanese long-term government bonds.

For more market news and comments, check out our market updates page

Capital market returns in October

Capital markets returns
Notes: Market data from Bloomberg as of October 31, 2023. Index returns are for the period: 2023-10-01 to 2023-10-31. In order, the indices are: MSCI World (lcl), BBG Barclays Multiverse, S&P 500 (USD), TSX Composite 60 (CAD), Nikkei 225 (JPY), FTSE 100 (GBP), EuroStoxx 50 (EUR), MSCI EM (lcl), Russell 2000 - Russell 1000, Russell 1000 Value - Russell 1000 Growth, USA 10-year Treasury Future, CAN 10-year Gov't Bond Future, GBR 10-year Gilt Future, DEU 10-year Bund Future, JPN 10-year JGB Future, BAML HY Master II, iBoxx US Liquid IG, Leveraged Loans BBG (USD), Provincial Bonds (FTSE/TMX Universe), BAML Canada Corp, BAML Canada IL, BBG Gold, BBG WTI, REIT (MSCI Local), Infrastructure (MSCI Local), BBG CADUSD, BBG GBPUSD, BBG EURUSD, BBG JPYUSD.

Meet your authors

Jules Boudreau, MA, CFA
Senior Economist, Mackenzie Multi-Asset Strategies Team

Jules Boudreau is the Senior Economist in Mackenzie’s Multi-Asset Strategies Team. Jules leads the team’s macro investment research, informing the positioning of multi-asset funds totaling upwards of $40 billion in assets. In addition, he provides analysis on economic trends and events and delivers presentations on the interaction between markets and the global economy.

Prior to joining Mackenzie, Jules worked at the Bank of Canada, where he contributed to the Bank’s Business Outlook Survey and produced research exploring inflation dynamics and the effectiveness of monetary policy. Jules holds an MA in Economics from UBC, where he was a Social Science and Humanities Research Council (SSHRC) Scholar, as well as an Honours BA in Economics and Math from McGill University. He is also a Chartered Financial Analyst (CFA) charterholder.