A weak dollar may benefit Canada

Canada’s poor performance this year is impacting the loonie.

But there’s a silver lining: if our dollar remains weak, it could end up helping the economy, says Pablo Martinez, assistant vice president at CIBC Asset Management. He is co-manager of the Renaissance Canadian Bond Fund.

That’s because the U.S. receives 85% of our exports, he suggests. And if the dollar continues to dip, American companies may be more inclined to do business with us.

The only downside is a weak loonie could negatively impact companies that import because it’ll be “a lot more expensive for them to do [business],” says Martinez.

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He adds, “The Bank of Canada is predicting that GDP growth will shift…towards private investment and exports” and away from depending on housing and consumer spending. And “if you want to [focus on] exports, you have to have a low dollar…[So], I think the Bank of Canada doesn’t mind…having a dollar that remains weak.”

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Martinez also notes that the Canadian dollar has historically been correlated to U.S. oil prices. Now, however, the loonie is more strongly impacted by foreign financial flows.

For example, when investors buy into Canada, the value of the Canadian dollar increases. Since “investors [have now] taken a bit out of Canada, that’s having an impact on the dollar” and has driven down its value.

Read: Snowbirds unfazed by weak loonie

Market tips

The U.S. will outperform Canada in 2014, says Martinez, even though the U.S. suffered more during and after the 2008 recession.

However, it’s hard to tell which country will come out on top currently because January and February economic data has “been weak…and distorted by bad weather” across the U.S., he adds.

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Weather does impact growth numbers, explains Martinez, “so we have to wait for a few months for [data] to normalize. The forecast we had last year will be the same this year, which is a [Canadian] economy that’s growing at a moderate pace.”

As such, he suggests that clients maintain weights in fixed income. Even though the bond market backed up about 100 basis points recently, he adds, it’s recovered and it won’t be “bearish for the year to come. I don’t think rates will move higher very quickly [since] it would just choke the economic recovery.”

Further, bond bear markets don’t last long, says Martinez. They normally last less than a year, whereas “equity bear markets [are] much longer and more painful.”

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