Desjardins' Mirza Shaheryar Baig shares insights with Wealth Professional
Gold has surged more than 40% this year, but the Canadian dollar has hardly moved; a disconnect that comes down to the scale of Canada’s mining industry relative to the broader economy.
That’s according to Mirza Shaheryar Baig, foreign exchange strategist at Desjardins, who has been sharing his insights with Wealth Professional.
“Canada is the fourth largest gold producer in the world, and at current prices, gold and silver exports are projected to earn about 8% of our exports this year. The reason the Canadian dollar has not benefitted from higher gold prices is that gold is still a small part of the overall economy,” he says. “Moreover, mining firms are not ramping up production. Lengthy permitting processes means the lead time for starting a new project runs for approximately 3+ years, in addition to there being a chronic shortage of skilled miners.”
Baig cites research that shows that a currency benefits most from commodities when rising prices translate into rising investment and employment: “So far, there is little evidence that this has yet to happen in Canada,” he says.
Baig’s models now show gold explaining 12% of weekly variance between the loonie and the greenback, surpassing oil, which is a notable shift for a currency long tied to crude.
“Currency and commodity markets chase trends,” Baig explains. “Gold prices are moving, while oil prices are stable. Our models isolate the effects of each, and I am not surprised that gold prices are affecting the judgement of currency traders. If oil prices turned more volatile, their impact on currencies would rise too.”
Driving that renewed role for gold is a global search for safe havens.
“Gold has taken on renewed importance as its price climbs, driven in part by investors seeking refuge from the weakening U.S. dollar,” Baig says. “Foreign central banks are increasing gold in their reserves while cutting back on US Treasuries. Many investors are doing the same out of concern that US government debt and deficits will lead to higher inflation.”
Despite the growing attention to gold, Baig cautions that monetary policy remains the biggest driver and how central banks surprise relative to expectations. He points to the Fed as an example.
“Markets have reduced their expectation of ‘how low the Fed will go’ by at least 25bps since the last FOMC meeting, as Chair Powell signalled, a more cautious pace of easing than what markets were expecting,” he says.
Meanwhile, in Canada, “the Bank of Canada has resumed rate cuts, but many market participants are still under-estimating the scope for rate cuts by the Bank, in our view.”
Asked whether gold’s current FX influence is temporary or structural, Baig says that the demand for physical stores of value to replace fiat currency savings is a structural shift. This shift is related to intractable trends in government deficits and debt and amplified by geopolitics.
“Since Russia’s FX reserves were frozen, central banks, in many countries, particularly China, have stepped up purchasing gold. These buyers are thinking about national security and monetary sovereignty. Price is less important,” explains Baig.
Economic outlook
For Canadian businesses, Baig believes the outlook is relatively stable.
“A range-bound loonie, expected to stay between $1.35 and $1.40 CAD per USD, suggests relative currency stability,” he says. “For exporters, a weaker Canadian dollar (closer to $1.40) makes Canadian goods more affordable for US buyers, potentially boosting demand. For importers, a stronger loonie (closer to $1.35) helps reduce the cost of purchasing goods from the US. Overall, this stable range allows businesses to plan with more confidence, manage pricing strategies, and reduce currency-related risks.”
Looking further ahead, though, the balance is less certain.
“The Canadian dollar is fundamentally undervalued, and most forecasters are expecting a rise. But the currency is a shock absorber for the economy, and what happens will depend on whether the Canadian economy has a speedy recovery,” Baig says, noting two major risks. “Canada’s twin growth engines of making cars for the Americans and building houses for new residents are fundamentally challenged. Whether the economy rebounds or stays on the slow track depends on how quickly it can raise productivity and expand investment in the minerals sector.”
That leaves two potential outcomes.
“One wildcard could be that investment in minerals accelerates and the Canadian dollar rebounds much more than forecasters expect. Another wildcard could be that the pace of transition remains very slow, and the Canadian dollar falls further,” Baig says.
For now, Baig says that investors focus more on gold than oil: “But if oil price volatility increases (like it did following the start of the Russia/Ukraine war), oil might play a larger role.”
