Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BofA Securities foreign exchange strategist Howard Du finds reasons to be bullish about the loonie,
“We remain constructive on the CAD over the medium term as: 1. The Fed is likely to pause the rate hike cycle around mid-2023. We also see material upside risk for renewed BoC rate hikes if the CAD weakens by too much on monetary policy divergence with the Fed. 2. Risk sentiment for 2023 would likely still improve compared to 2022. 3. Broad balance of payment is supportive of CAD appreciation. Latest FOMC meeting confirms the Fed also believes tightening of credit conditions due to US regional bank stress would likely alleviate some rate hike pressure for the U.S. ... The Fed-BoC terminal rate spread has stabilized at around 50 basis points, which should point to lower USD/CAD, in our view … We revise our USD/CAD forecast for 2023 slightly higher, but still see downtrend play out over the medium term with the pair below 1.30 [CADUSD US$0.77] by end of the year”
“Three reasons to be bullish on CAD (BofA)” – (research excerpt) Twitter
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Morgan Stanley commodity strategist Marius van Straaten does not see the positive effects of China’s economic re-opening in the metals space,
“China’s reopening hasn’t boosted demand above seasonal trend yet and wider macro concerns are taking hold. Precious metals and aluminium are our top picks, while we turn bearish on iron ore for 2H23 … commodities now find themselves on shaky ground. The initial excitement about the impact of China’s reopening on commodities has faded, as hard data points remain mixed and are hard to disentangle from the regular Spring construction seasonality. While there are some pockets of strength, such as infrastructure, vehicle sales started the year on weak footing. There are some green shoots in China’s property industry, but we are still far from a full reversal. It clearly takes time to turn around the oil tanker that is China’s economy … Aluminum remains our base metal top pick, as China’s constrained production drives a large deficit. We are more cautious on copper into 2H,as supply-side challenges fade and we see the market moving into surplus. We are outright iron ore bears on that same time horizon, as we think steel production curbs are likely in China”
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RB Advisors noted that markets are pricing more default risk into U.S. Treasuries,
“The current environment seems full of pseudo-safe assets: cryptocurrencies, smaller growth companies, and private equity and debt might be prime examples. So, Treasuries remain quite safe compared to these imposters. The risk of a US default should nonetheless be fully appreciated. The markets re-priced Treasuries to account for the downgrade of US debt by Standard & Poors in 2011. The cost to the U.S. government has more consistently been between 100-200 basis points higher yield relative to German Bunds than it was prior to the downgrade … The U.S. government 1-year CDS spread (i.e., insuring against default in the forthcoming year) is now higher than it was when US debt was downgraded in 2011, which suggests the markets feel the risk of default is higher than it was in 2011, and another US debt downgrade would likely further increase interest costs to the U.S. government and to the overall US economy … CDS spreads currently suggest a U.S. default is more likely than are senior investment grade bonds issued by financial companies … We remain overweight long-term Treasuries based on our view that US nominal growth will slow through time, as a hedge against more economically-sensitive equities, and the structural difficulties of holding German Bunds.
“However, U.S. Treasuries are clearly not the same safe haven asset they were prior to 2011′s downgrade of US debt”
“Is the safe haven still safe?” – RB Advisors
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Diversion: “Fearing ‘loss of control,’ AI critics call for 6-month pause in AI development” - Ars Technica
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