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Outlook

13 Jul 2023

Yield differentials could narrow – and even flip.

Many things could go right for the Canadian economy in the months ahead. Housing markets have the potential to go from strength to strength as immigration flows lift demand and elevated financing rates limit the supply response from builders and existing homeowners. High and stable equity market valuations may support household wealth effects. Aggregate nominal household incomes might keep rising as persistent labour market imbalances put upward pressure on wages. And exports could hold up, particularly if the US consumption engine keeps running and a comprehensive stimulus effort from Chinese policymakers supports global commodity demand. The Bank of Canada –...

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13 Jul 2023

China might defy its skeptics once again.

We think a bullish scenario could unfold if authorities unveil a larger and more broad-based stimulus package to prop up the fading economic expansion. In our assessment, a more definitive re-acceleration in China’s growth pulse, particularly across the domestically-oriented services sector, could encourage a recovery in capital inflows as the economy outperforms on a relative basis. Alternatively, a more shallow global slowdown, coupled with a faster and less disruptive deceleration in inflation – which might enable developed-economy central banks to shift away from restrictive policy stances sooner – could be a negative for the US dollar, helping support risk assets...

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13 Jul 2023

Balance of payment risks remain substantial.

A somewhat more bearish outcome for pound would likely come from a more protracted and pronounced period of UK and global economic weakness, especially if it occurs with inflation still well above target. A “stagflation” scenario – in which growth stays weak, and inflation remains uncomfortably high – could accentuate the country’s yawning current account deficit (~3.7 percent of gross domestic product). A further deterioration in an already-precarious balance of payments position could see the pound adjust lower to attract the capital needed to fund the external imbalance. GBPUSD versus UK terms of trade

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13 Jul 2023

Rest-of-world vulnerabilities look significant.

In the aftermath of the 2008 global financial crisis, households and businesses in the United States deleveraged, and have thus far managed to keep debt levels relatively restrained. In contrast, private sector leverage has risen spectacularly – in both absolute and momentum terms – in countries like Australia, Canada, South Korea, and France, and in smaller economies like Denmark, Norway, and Sweden. In China, decades of unproductive investment and unrestrained credit creation have left policymakers struggling to manage ballooning debt burdens across the financial system. If global liquidity conditions worsen and borrowing costs remain stubbornly elevated, we suspect these vulnerabilities...

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13 Jul 2023

More upheaval lies ahead.

We are looking for the Australian dollar’s volatility to continue through the third quarter. We see the exchange rate oscillating in a 0.65-0.69-cent range as various crosscurrents play out. The list includes more market turbulence, global and Australian recession fears, China’s stumbling recovery and weaker renminbi, narrower interest rate differentials, the flow support from Australia’s current account surplus (circa-1.4 percent of gross domestic product), and solid underlying commodity demand from the global green energy push. But beyond the next few tricky months, our underlying view continues to be for the Australian dollar to edge up into the low 0.70’s by...

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