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Is It Game Over for the Greenback?

May 15 to 19, 2023


Is It Game Over for the Greenback?

May 15 to 19, 2023


Market Recap

  • The S&P 500 is up a solid 7% this year, despite concerns about the economy, debt ceiling, and ongoing stress in the bank sector.
  • That is impressive resilience given all of the challenges thrown at the market.
  • There are a number of reasons why stocks and risk assets more broadly have held in from a macro perspective.


Tensions between China and both Canada and the United States have ratcheted up in recent weeks, prompting concerns about further escalation and potential risk for investors. We do expect tensions to continue to grow as we approach 2024, which is a U.S. presidential election year. The current political environment demands that politicians on certain parts of the political spectrum take a hard line on China, and that’s not likely to change in the near term. But that type of rhetoric is nothing new—tension is already being priced in by markets, and we wouldn’t expect the situation to get out of hand. The one potentially worrisome sign would be if we see more news about the de-listing of Chinese stocks, which was an approach more characteristic of the Trump years than the Biden administration. But aside from Tik Tok, which is a somewhat different situation, de-listings haven’t materialized. We did recently take down our Emerging Markets (EM) view from bullish to slightly bullish, but that wasn’t related to geopolitical tension—we simply saw growth underperform expectations.

Bottom Line: Rising tensions are par for the course as we approach an election year.

US Dollar (USD)

Recently, a number of articles have suggested that we may be approaching the end of the USD’s era of dominance, and that a new paradigm of global finance may be emerging with BRICS (Brazil, Russia, India, China, and South Africa) at its centre. But are these fears justified? This debate has popped up occasionally over the past five or 10 years, especially when gold is doing well, or when Bitcoin bounced back from its lows. The reality is that, for various political and financial reasons, many people don’t want the USD to be the reserve currency, so an attempt to shift away from it is not surprising. But look at which currency strengthened during COVID: it was the greenback. That demonstrated that the USD is still the financial world’s reserve currency, meaning the currency that does well when markets are in fear and the economy is in the tank. Unless we see a massive swing away from that line of thinking, any speculation about a new paradigm is overblown. Recently, we have seen the strength of the USD starting to come off. But that’s because the risk appetite and interest rate environment have changed, not because it’s losing dominance in a broader sense. Despite attempts to change the status quo, the USD is still where investors go in a crisis.

Bottom Line: Rumours of the greenback’s demise have been greatly exaggerated.


The latest U.S. inflation number came in lower than expected, and with other major economies either reporting soon or having already reported, it’s worth taking a step back and examining what the inflation picture looks like from region to region. In Europe, the inflation situation is improving. It was at a higher inflation point than other economies, and while others regions’ numbers were starting to come down, Europe’s were still going up. But now, it has also peaked, and the numbers are beginning to recede. It’s likely that the situation will play out like it did in the U.S. and Canada: after inflation peaks, it drops quicky to a certain level and then gets stickier. Europe still needs to be more aggressive on interest rates than North America, with 25-basis-point hikes more likely than larger ones given the improving numbers. On the other side of the pond, Canada’s inflation situation has been rosier than that of the U.S., but that momentum is starting to shift in the U.S.’s favour. In general, we don’t anticipate an aggressive policy from the Bank of Canada, even though inflation is likely to be fairly sticky going forward. There have been whispers about a possible rate increase, and while it’s not a zero-probability event, the bar for it to happen is high. On the U.S. front, there are two ways to read the situation. One is that inflation numbers are coming down, which could give the Federal Reserve ammunition to pause at the next meeting. Another is that inflation didn’t come down strongly enough to precipitate a rate cut—which is important, because a rate cut is currently being priced in by markets. The point is that you can find a hawk or a dove in the latest numbers depending on what you’re looking for. We continue to believe that a rate cut is off the table— even as the banking crisis unfolded, the jobs numbers and Consumer Price Index (CPI) print were good.

Bottom Line: The U.S. is likely not going to reach its 2% inflation target this year, which means there’s little reason for the Fed to cut rates.


In previous months, we were neutral on Equities except in our more conservative portfolios. Now, we’ve gone slightly underweight Equities across the board. The rationale is based on three things. First, we don’t see a massive driver of significant upside from here, at least not in the short term, while there are a number of potential risks on the downside. Second, while earnings largely beat expectations, they were still relatively low, and that could have an impact on the consumer in one-two combination with a potential slowdown of the economy. And third, the deterioration of the economy and the employment situation is likely to accelerate. Putting those factors together along with ongoing geopolitical risk and other headwinds, it just makes sense for us to be a little more defensive. It’s also important to remember that if we’re overreacting and markets do really well, our clients will have relatively good results—we still have Equity exposure, we’re just slightly underweight. But if we’re right and the economy does weaken further, we’re protecting the downside. This strategy has been validated by the phenomenal year we’ve had so far in our multi-asset portfolios, and particularly the BMO ETF Portfolios. Regionally, we did move our Canadian exposure to neutral from slightly bearish, and our EM exposure to slightly bullish from bullish. While we still like EM, and China in particular, the underlying fundamentals of the Canadian market are likely better for downside protection. And on the fixed income front, we decreased our high yield exposure, and you’re likely to see us gradually increase our Duration exposure.


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