Some economists have recently pointed out issues with the fact that the Canadian dollar is now trading around 79 cents U.S. At this level, which is unusually high from a long-term perspective, Canadian exports have been hurt. Economists have thus called for more monetary stimulus to match the depreciating U.S. dollar and other currencies around the world.
The Bank of Canada has set the overnight lending rate at 0.25%. While this may seem like rock bottom, and it’s pretty darn low, this is actually among the highest rates in the Organization for Economic Cooperation and Development. A cut to this rate could restore the competitive advantage Canadian exporters have enjoyed in recent decades. This is the primary thesis behind such a potential rate cut on the environment.
Investors could see Canadian stocks rally in such an environment. If interest rates are cut, Canadian stocks could see momentum, as investors factor in this lower risk free rate into their models. Canadian bonds and fixed income yields would drop, pushing more capital into equity markets. The “TINA” (there is no alternative) trade is likely to pick up steam, and Canadian investors will be forced into equities whether they like it or not.
This means holding through the volatility is likely the best option for all investors. We may see a significant market correction on the horizon. That said, equities have always rebounded and will continue to do so. Staying invested and staying patient is the key here.
Invest wisely, my friends.
