The fast pace of vaccine rollouts in the US, strong growth prospects for the Canadian and US economies and the potential for the Bank of Canada to be the first to lift rates bode well for the CAD to hit a four-year low against the USD. Meanwhile, a slow vaccination rollout in Europe coupled with the spread of the UK variant in Italy will weigh down the Euro. While Canadian auto sales saw an uptick in February month-over-month, growth in new vehicle sales is being slowed by a global chip shortage that is limiting production of vehicles in both Canada and the US, despite an increase in demand. A jump in bond yields, meanwhile, might have caught investors off guard but Scotiabank analysts say the normalization in yields should be viewed as an indication that global growth is improving.
Scotiabank analysts and economists weigh in on what the pandemic means for foreign exchange, the auto industry and equities.
Foreign Exchange
- The US dollar’s sideways trajectory since the start of the year extended this week as markets remain in a cautious stance following a quick rise in government bond yields, especially in US debt. With bond volatility still sitting near its highest point since last spring’s market meltdown, investors have turned to the USD for its haven status and, to some extent, due to an improvement in the USD’s yield appeal (leading to notable losses for the Japanese yen in 2021), while equities ease off record highs (particularly in the tech-heavy Nasdaq).
- In the US, the fast roll-out of vaccinations has increased reopening and growth prospects, leading some to speculate that the Federal Reserve will withdraw stimulus sooner than previously anticipated. President Joe Biden announced this week that there will be enough vaccines for all adult Americans by the end of May. Meanwhile, the EU’s vaccination drive maintains a sluggish pace and the quick spread of the UK variant in Italy will likely see that country enter another strict lockdown — further impacting the EUR owing to weak growth prospects.
- The Canadian dollar has been among the best performing major currencies in the past few weeks due to resilient crude oil and metals prices, and better than expected economic data in late-2020 that has pulled forward Bank of Canada policy tightening bets. Market pricing implies that the BoC will be the first of the major central banks to lift rates, as soon as Q1-2022. The passage of a US stimulus bill also has positive economic spillovers in Canada that may offset the impact of a slow deployment of vaccines, which should accelerate as supply issues are resolved and other vaccines are granted approval.
- Next week will be pivotal for the CAD, with the BoC’s policy announcement on Wednesday and the February employment report on Friday. If the BoC notes that it expects a return to on-target inflation sooner or mentions the possibility of slowing the pace of bond purchases, USD/CAD could aim for a new four-year low after its late-February bottom of 1.2468. The February jobs report is expected to show an improvement from the sharp decline in January, but still a contraction in jobs as strict virus limits remained in place throughout the month across most of Canada — the relaxation of measures in March should see an increase in employment.
— Shaun Osborne, Managing Director, Chief FX Strategist, and Juan Manuel Herrera, FX Strategist
Automotive
- Canadian auto sales picked up in February, compared with the previous month, but were still down relative to a year ago. DesRosiers Automotive Consultants Inc. estimates that new vehicle sales declined by 9.9% year-over-year. On a seasonally adjusted basis, sales posted a strong 10% gain month-over-month. While lockdowns across the country were being lifted by late January, some major markets including the Greater Toronto Area, which represents a fifth of Canadian output, remained under tight restrictions for February.
- In the US, inventory shortages and weather events temporarily disrupted the sector’s recovery, with February sales declining 5.8 % m/m. The year-over-year unadjusted decline (at -12.6%) was padded by an extra sales weekend this year, while seasonally adjusted sales sat at just 15.7 million units. American consumers were primed to spend the USD164 billion in stimulus cheques they received in January, but severe weather events across large swathes of the country kept many consumers home (and some dealerships closed) including in Texas, the second largest auto sales market.
- A global chip shortage is exacerbating already-tight inventories across North America, with Wards Automotive forecasting a consequential 10% contraction in vehicle production in the first quarter. This will likely place continued upward pressure on prices. New-vehicle price inflation in Canada continued its upward trend to 2.8% y/y against headline inflation of 1.0% in January.
- Canada’s resilient economic recovery supported by elevated household savings and extended employment benefits (not to mention vaccines on the horizon) should further underpin new vehicle demand — albeit pent-up — until supply constraints are resolved. This could erode sales by 5% to 10% for the next few months and represents a material risk to our 2021 forecast sales of 1.8 million units should serious shortages persist into the second quarter.
- A stronger economic recovery in the US also will fuel demand as the year advances including through another round of stimulus cheques in April. We maintain our 2021 outlook at 16.7 million units, while acknowledging the chip shortage could push out demand to 2022 if the shortage persists.
—Rebekah Young, Director, Fiscal & Provincial Economics
Equities
- The reflation trade takes hold. The velocity of the bond yield move caught some investors off guard, but we believe that 1) bond yields are still too low to hurt equities and 2) the normalization in yields should be viewed as an indication that global growth is healing (positive) as both inflation expectations and real yields are rising.
- Repositioning causing turbulence. Recent choppiness in equities has been blamed on bond yields, but we believe the repositioning of portfolios out of growth areas has caused recent turbulence.
- Consensus taking GDP & EPS forecasts higher. With decelerating COVID-19 cases around the globe, the vaccine rollout finally accelerating, the US stimulus plan expected to go ahead, and the Fed expected to stand still, the outlook is improving. Revisions to GDP forecasts and EPS expectations have continued to be biased higher.
- Asset mix model. Pre cash adjustment, our equity signal for March stands just under an 11-year high hit in late Q4/20. Technicals, Consumer Confidence, and Jobless Claims are all pushing for maximum equity exposure. The ISM Manufacturing and Earnings Revisions are at or near multi-year highs, which is also extremely positive. Finally, high Valuation levels are offset by earnings back on a growth path. Government bonds remain underweight, while Corporate bonds maintain a small overweight.
- Portfolio positioning: We’re adding to Financials/Banks after a stellar reporting season. As we indicated recently, we believe the stars are aligning for the sector. We are further trimming our gold exposure (underweight). Overall, our sector positioning is unchanged as we remain overweight Financials, Industrials, Discretionary, and Resource sectors (Base Metals, Lumber and Energy).
- Conclusion. Despite some volatility of late, we believe the global macro picture will continue to improve, supporting earnings and stock prices. Despite recent outperformance, cyclical-value sectors remain well positioned to maintain their leadership role (they are cheaper, offer positive sensitivity to bond yields and commodities, and enjoying strong EPS revisions).
— Hugo Ste-Marie, Director Portfolio & Quantitative Strategy; Jean-Michel Gauthier, Associate Director, Portfolio & Quantitative Strategy; and Simone Arel, Research Associate, Global Equity Research
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