The loonie continued its climb this week, trading to a new six-year high against the greenback as the US Fed signalled a possible stimulus reduction in August. Any gains the USD saw this week from the Fed minutes were short lived. Gold is starting to look promising. Over the long run, the precious metal tends to display a relatively strong negative correlation with the USD and real bond yields, and a relatively elevated positive correlation with inflation surprises. April home sales in Canada softened month over month but are still a lot stronger than last April. However, demand for housing is expected to increase alongside jobs-recovery and population growth resulting from immigration into 2022 as domestic and global economies open.
Scotiabank analysts and economists weigh in on what the pandemic means for foreign exchange, equities, commodities and housing.
Foreign Exchange
The USD lost ground over the week as downward pressure continues amid limited signs the Fed will reduce stimulus in the near-term. With the US economy still short of making “substantial progress,” the Fed will likely wait until August before signaling an incoming reduction in its pace of purchases. This comes despite surging inflation (mainly attributed to transitory factors) and the April FOMC minutes suggesting that “a number” of Fed officials believe the time to discuss tapering is approaching; the USD gained sharply on the release of the minutes, before edging back toward a loss for the week.
The CAD traded to a fresh, six-year high against the USD, trading fractions above the 1.20 point before consolidating. Choppy risk sentiment — in the crypto space as well as equity markets — and somewhat softer crude oil prices to some extent curbed CAD gains. While the USD snapped higher from its Tuesday low and strengthened further on Wednesday on the Fed minutes in what looked to be a meaningful way, the rebound ended up being relatively shallow and short-lived, reaffirming the strength of the underlying trend lower in USDCAD.
Canadian yields at the shorter end of the curve continue to trade at a premium to similar US yields, proving essential support for the CAD tone against the USD. CFTC’s positioning data suggest that speculative traders are finally warming up to the fundamental attractions of the CAD. Net CAD long positioning has doubled in the past two weeks but remains far from excessive; there is still room for the CAD rally to run. We forecast USDCAD reaching 1.19 late this year.
— Shaun Osborne, Managing Director, Chief FX Strategist, and Juan Manuel Herrera, FX Strategist
Equities
Gold set to move higher: Inflation rising, dollar falling and technicals improving. While we have been underweight in the gold and precious metals sector for a while, we have started to warm up to the space. Not only do we believe the macro outlook is supportive of bullion, but the recent bounce has pushed the spot price above the sell-side consensus (if sustained, expect positive earnings revisions), and the technical picture has improved after several months of deterioration. For reference, consensus pegs the average gold price at $1,777 USD in 2021 and $1,700 USD in 2022.
What makes gold tick? Correlation with different types of inflation metrics, the dollar, other commodity prices, and real yields are calculated. Over the long run (past 45 years), gold displays a relatively strong negative correlation with the US dollar and real bond yields, while a relatively elevated positive correlation with inflation surprises. Broad inflation, and especially inflation surprises, exhibit higher correlation coefficients than any other type of inflation (such as food, wages, services, etc).
Inflation: Rising and sticky. A combination of factors could push inflation higher and make it stickier than the Fed expects, which is good news for gold. Still, we note that the level of inflation also matters for gold and we’re just entering that supportive zone (>3%).
USD: Downside potential still elevated. We remain bearish of the USD and further depreciation should lift bullion.
Nominal yields have upside, real yields not so much. Real US 10-yr bond yields, i.e., nominal yields minus CPI, could remain low for quite some time, especially if inflation shows its teeth.
Gold equity valuations. Gold equities are attractive trading at a 15% discount versus spot prices. We forecast FCF yields (at spot prices) of 5% to 7% for the next two years.
— Hugo Ste-Marie, Director Portfolio & Quantitative Strategy; Jean-Michel Gauthier, Associate Director, Portfolio & Quantitative Strategy; and Simone Arel, Research Associate, Global Equity Research
Housing
Canadian home sales took a turn in April 2021, declining 12.5% on a seasonally adjusted (sa) basis from the highest level on record in March 2021. Listings followed suit, falling by 5.4% (sa m/m). While both sales and listings decreased in April, the smaller decline in listings further eased the national sales-to-new-listings ratio to 75.2% from record high readings earlier this year (the highest being 91% in January). While this is a move in the right direction toward a better supply-demand balance, the ratio is still significantly higher than its long-term average of 54.5%. As a result of this persistent tightness in the housing market, the composite MLS Home Price Index (HPI) rose by 2.4% (sa m/m).
Compared with April 2020, the numbers tell a hugely different story, with sales up 256% (nsa y/y) — a number largely skewed by base effect since sales recorded the largest decline on record in April 2020. To get a better picture of this month’s results, we calculate the 20-year April-average from 2000 to 2019 — in comparison to this average, sales in April 2021 were a seasonally adjusted 57% higher.
The housing market remains historically strong despite the slowdown in sales relative to March. We don’t have a firm understanding yet of the reasons for the slowdown, but it could reflect COVID-related impacts, the erosion in affordability, and limited choice owing to the decline in listings. It may also be that homebuyers are adjusting their plans should the Bank of Canada tighten its policy rate next year. However, it doesn’t the fact that the fundamental issue in the housing market today is the chronic shortages in housing supply and has been underlying this surge long before COVID hit.
Into 2022, as domestic and global restrictions begin to lift, we expect demand for housing to increase alongside jobs-recovery and population growth resulting from immigration. Until we are able to increase the stock of homes, though, home prices are more likely to go up than down, albeit at perhaps a slower pace than the unsustainable one witnessed this past year.
—Farah Omran, Economist
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