Recap & Outlook: Foreign Exchange and Interest Rates

Michael Rudd, CFA | President, CEO and Portfolio Manager

As we noted in the last Outlook, recent volatility in financial markets has been related to ongoing trade tensions between the United States and China. We can now add Mexico to this list after the US administration initiated unorthodox punitive trade tariffs as an attempt to tighten border control. We continue to view this as a temporary issue based more on negotiating tactics than actual long-term negative change in the relationship between these nations. Indeed, the recent short-term negative sentiment has somewhat abated for the time being.

In our last Outlook, we noted that we wanted to spend more time researching and writing about the current debt situation in various markets, as we viewed this was a potential risk that could end the current economic cycle. However, over the past week, we noticed a change in the narrative related to the US economy and employment related to employment and interest rate expectations.

  • Growth of US Employees on Nonfarm Payrolls released by the Bureau of Labor Statistics today was much lower than expected. Last month, 263,000 jobs were created. This month, the market expected 175,000 more but only 75,000 were created. We also noticed that US Purchasing Managers Index fell from 55.5 in February to 50.9 this past month. This is just above the critical 50 mark which separates expansion from contraction.
  • Canada, on the other hand, had strong employment numbers producing 27,700 jobs, while the market expected only 5,000 jobs would be created. Some were even calling for a substantial drop. This has caused strengthening in the Canadian dollar as interest rate expectations have shifted somewhat in the two countries.

“This means that” with the trade tariffs and various negotiating tactics, the market’s view of the US economy has deteriorated somewhat. In the US, market expectations have shifted towards the FOMC cutting administered rates for the July 31st, 2019 meeting. The last time this happened (fall of 2018) the Fed did not react as the market expected and a rout ensued.  At this point, no one knows how the Fed and market will react into the summer, but it is probably safe to say that either way we can expect some volatility. As always, we will continue to watch the data closely and remain focused on the fundamental positioning of the businesses that we own.

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