The two big questions on the global currency front concern the U.S. dollar and the Chinese renminbi. Specifically, in which direction will the greenback head, and will the renminbi increase?
For Canadians, there’s a third question: will high oil and resources prices keep pushing the Canadian dollar up against the US$, even if other currencies are dropping against the greenback?
The direction of the US$ will be determined by U.S. growth. Money managers who expect the U.S. to stagnate for several years are certain the greenback will keep falling, while most who expect moderate or better growth believe it will rally.
The exception is Norman Rasch-kowan, chief investment officer with Mackenzie Financial Corp. in Toronto, who sees no reason for downward pressure on the US$ to abate — especially as he believes the U.S. government is trying to push the US$ lower to make exporters and those who compete against imports more competitive.
Most of the movement in the US$ is expected to be against the euro and the yen. That will be good if the greenback increases, as it will take pressure off European and Japanese exporters; but it will be bad if the greenback sinks.
The euro and yen are already overvalued. What’s needed is for the greenback to drop in value significantly against the renminbi and other non-Japanese Asian currencies. However, few money managers believe that will happen — particularly against the renminbi; there’s a real risk of social unrest in China if unemployment climbs, which could happen if export growth is dampened by a higher renminbi.
However, a few money managers believe there will be some appreciation in the renminbi. Bill Sterling, chief investment officer with Trilogy Advisors LLC in New York, which manages some of CI Investments Inc.’ s funds, says China might have its own reasons to push up its currency, should its economy grow at a 9%-10% rate and inflationary pressures start to build.
He adds that 5% appreciation is possible by mid-year, which would probably be matched by other Asian countries that are under pressure to push up their currencies but don’t want to do so until China does so.
Stéphane Marion, chief economist and strategist with National Bank Financial Ltd. in Montreal, also sees a 5%-10% appreciation in the renminbi.
Marion notes that many Asian currencies are pegged to the US$, which forces them to follow U.S. monetary policy, which in turn is currently much too expansionary. He points out that some of these countries could decide to abandon the peg to the US$.
Most money managers expect resources prices to remain around current levels this year and, as a result, they expect the C$ to remain around parity with the US$, which won’t be good for our manufacturing exporters. (The C$ moves with resources prices, particularly oil prices.)
Nevertheless, some money managers recommend currency-hedged investments in case the C$ rises, as a higher loonie would mean lower returns on U.S. investments when translated into C$. IE
Greenback, renminbi take centre stage
For Canadians, a major question is whether high resources prices will keep pushing the loonie upward vs other currencies
- By: Catherine Harris
- January 26, 2010 January 26, 2010
- 11:09