January’s interest rate cut, which sent the dollar sharply lower, helped offset the impact of lower oil prices. The oil price shock has been short and sharp, but the economy has largely been able to shake it off. A year from now we’ll be firing on all cylinders.
It is example of how quickly things can change and a good illustration of why it pays to take predictions with a grain of salt. We love predictions because they offer the illusion of certainty. But as Nobel physicist Nils Bohr once said, tongue in check, “Prediction is very difficult, especially if it’s about the future.”
The first is that if you have a mortgage coming due, or are sitting with a floating rate, it may be time to lock in. Or at least put it on your watch list. Ontario’s largest credit union, Meridian, is teasing home buyers with a low of 1.49 per cent for an 18-month term for those in five-star financial health. The top fixed rate for a five-year term is 2.49 per cent.
Those sorts of deals aren’t likely to be here a year from now. That’s because an economy ‘coming home’ — Poloz’ folksy term for strong growth — means higher inflation. Inflation is already running at the high end of his 2 per cent target and has nowhere to go but up. Up, means interest rate increases, which some economists see this coming before the end of the year.
The other thing to consider is that now may be the time to buy U.S. dollars. If you’re travelling to the U.S. later this year, are a snowbird, or own a U.S. property, today’s exchange higher rate may be temporary.
The dollar has recovered some of the ground it lost this winter. This is because oil prices have rebounded and our currency is seen as linked to oil and energy. But the rise in oil may be temporary and if it falls again so will our currency.
Related: Why oil rebound can’t last
The dollar started the year at 88 cents U.S. which became 78 cents after the rate cut. This week it was back to 82 cents U.S. on the oil price rebound and the message that more interest rate cuts are unlikely.
On the subject of predictions here’s a couple that haven’t turned out:
Year-to-date the S&P 500 index, a broad measure of U.S. market behavior, is up 4 per cent. The S&P/TSX is up just 3 per cent. Europe and Asia have been the place to be. Stoxx Europe 600, a basket of the largest European companies, is up 16 per cent year-to-date (with Russia the best performer) and the Dow’s Asia-Pacific Index is up 11 per cent.
When it comes to investments and the economy there’s always some sort of surprise. The trick is to have a plan and stick to it. That way when things change, the noise escalates and the fear factor rises you have some context and a point of reference.
And remember, a forecaster is not smarter than everyone else. He merely has his ignorance better organized. Or so the saying goes.
More columns by Adam MayersEND
Where the dollar is headed
Q1* – 79 cents
Q2 – 85 cents
Q3 – 81 cents
Q4 – 79 cents