This Market Factors begins with a grim scenario for the loonie and continues with promising opportunities in the gold mining sector. The diversion outlines some potentially troubling health-care technology and we have quick hits as always.
Currencies
Fed to push CAD lower
The Canadian dollar is in for a beating if BofA economist Aditya Bhave is correct and the Federal Reserve hikes interest rates three times, or 75 basis points, before 2026 ends. The loonie’s value has primarily been driven by the difference between Canadian and U.S. bond yields and, with domestic yields unlikely to climb, the differential will only widen as the U.S. raises policy rates.
In basic terms, the value of any currency is determined by the amount of foreign currency being sold to buy it. Demand for Canadian dollars, for instance, can increase as foreign investors buy Canadian property, businesses or commodities. Foreign investors can also be attracted to Canadian bonds when relative yields are high.
The chart below compares the value of the loonie to the relative yields of shorter-term Canadian and U.S. bonds (weekly data). The x-axis shows the result of subtracting the yield on two-year Treasuries from the yield on two-year government of Canada bond yields. For example, the dot on the far upper right of the chart shows a week (it’s the end of October 2021 but dates aren’t shown on the chart) when the Canadian dollar was at 81 cents US and the yield on Canadian bonds was 0.6 percentage points higher than U.S. two-year Treasuries.
The trend line moving upwards to the right indicates that as Canadian bond yields climb relative to U.S. bonds, the value of the loonie follows higher.
The current situation, unfortunately, is plotted in the bottom left of the chart where the loonie is weakest. The Canadian two-year bond yields 1.4 percentage points less than the U.S. equivalent and the Canadian dollar is trading at 71 cents US.
The consensus economist view is that the Bank of Canada is on hold for the rest of 2026, so the two-year domestic bond yield will likely stay close to where it is now. If Mr. Bhave at BofA is correct and the Federal Reserve hikes 75 basis points, this will pressure shorter-term U.S. bond yields higher. We can expect U.S. bond yields to rise something close to 0.75 percentage points, pushing the bond spread from 1.4 percentage points now to over 2.0 percentage points.
Looking at the chart, the trend line if extended to -2.0 on the x-axis would intersect the Y-axis somewhere near 68 cents US. We can expect then that the loonie will fall roughly 3 US cents if BofA is right on the Fed.
Commodities
Gold stocks undervalued
BofA Securities analyst Lawson Winder sees the bullion price averaging US$5,093 an ounce in 2026, supported by a World Gold Council survey indicating that central banks will continue to buy precious metals. With this in mind, the analyst finds considerable value among Canadian gold miners.
Mr. Winder calculated the gold price that makes each mining stock’s price to net asset value multiple equal to its 15-year average. The average company he covers is trading at multiples implying a US$3,354 per ounce gold price, which is almost 20 per cent below the current spot price.
The price to NAV methodology indicates that Agnico Eagle Mines (AEM-T) is trading with an implied spot price 27 per cent below current levels, indicating significant upside for the share price. Barrick Mining’s (ABX-T) stock price suggests gold 30 per cent below current levels, making it more even more attractive.
Among smaller producers, Eldorado Gold’s (ELD-T) value implies gold 31 per cent below the current spot and B2Gold (BTO-T) is trading where gold should be 20 per cent lower.
The NAV-related exercise is only one way of finding value. Mr. Lawson did a similar calculation for enterprise value to EBITDA and the numbers were different (although the Eldorado Gold and B2Gold results suggested an even bigger bargain at current stock prices).
A participant competes during a Brain-Computer Interface (BCI) controlled robot contest at the World Robot Conference (WRC) in Beijing, China August 17, 2018.JASON LEE/Reuters
Diversions
Brain implants for good and ill
The increasing capabilities of Brain-Computer Interface (BCI) technology are like CRISPR in their ability to engender both wonder and unease. BCI is a happy miracle for those with paralysis, allowing communication with the outside world that vastly improves their standard of living. At the same time, imagining masses of healthy people constantly connected to the internet through brain implants sounds like the most cautionary science fiction.
Jessica Hamzelou has been closely following the trend for the M.I.T. Technology Review. Ms. Hamzelou profiled Casey Harrell, an ALS sufferer with three years of experience using a BCI implant. The technology allows him to communicate despite his inability to speak and perform his job as a climate activist.
Mr. Harrell has an actual jack in his head that allows wired connection with his computer. This is now unnecessary as wireless implants are now the norm. For others, functionality is possible with a cap of electrodes and no implant.
Most cases of BCI use involve spinal injuries, permitting those paralyzed below the neck to enjoy some aspects of mobility. Michelle Patrick-Krueger, an engineering professor at the University of Texas, estimates that 150 people have BCI implants. Experimentation is accelerating – the Elon Musk-backed Neuralink has implanted 21 people in the past 24 months. BCI is yet another technology with a vast capacity for good and also for abuse.
The essentials
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Globe Investor highlights
How market bets and economist views for BoC rate moves have shifted in the wake of Monday’s hotter-than-expected inflation data
Tim Shufelt on the big, fat asterisk hanging over the stock market
David Berman makes the investment case for Gildan Activewear after a short seller report tanked the shares last week
Ken Fisher on why AI hope and horror both miss the mark
Quick hits
Canada’s main financial regulator eased credit requirements for the banks in a surprise announcement Friday. It increases lending capacity at a time when banks aren’t fully using the room they have, which makes little sense at first glance. Jefferies analyst John Aiken thinks the move is to pave the way for extensive infrastructure-related loans incentivized by federal policy initiatives and I found this interesting.
Evercore ISI strategist Julian Emanuel reassured clients that the surge in IPO activity in the U.S. – the SpaceX issue was a circus and Anthropic and OpenAI deals are on deck – does not yet represent levels that historically have preceded market peaks or recessions. Mr. Emanuel thinks the IPOs will allow more investors to take part in the AI trend which will create more FOMO and frothier markets.
Investors looking for speculative excess need look no further than South Korea. The nation’s equity benchmark, 56 per cent composed of semiconductor providers Samsung Electronics and SK Hynix, is among global leaders in the past 18 months. The Wall Street Journal is reporting that young investors are jokingly planning to sell their underwear to buy more shares.
Read this week’s earnings and economic calendar here