BCA Research’s Global Fixed Income Strategy service recommends upgrading Canadian bonds to overweight within global hedged portfolios.
The firm notes that there are increasing signs that the Canadian economy is beginning to feel the pinch from a sluggish U.S. housing and auto sector, as well as the soaring Canadian dollar.
“Moreover, with the Canadian dollar now trading above parity with the greenback, consumers are waking up to the massive price differentials between Canadian and U.S. retailers (which can be 30-40% on clothing, electronics and autos),” it says. “Cross-border shopping is exploding as Canadians travel south to find bargains. Wal-Mart and other large Canadian retailers are being forced to slash prices. Overall retail prices have already started to fall.”
“While generalized deflation is unlikely, core consumer price inflation is set to drop sharply in the coming months, which will be positive for Canadian bonds,” BCA concludes.