Weekly Price Change May 27-June 2, 2017
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Currencies and interest rates were more volatile last week. The US Dollar Index (DXY) weakened 1.7% and 10 year benchmark bond yields rose by about one fifth of a percent. These are large changes over a short period, and seem contradictory.
The Canadian dollar was joined by the Euro, Pound, Aussie, Yuan, Real and Rouble, all of which gained decently in value compared to the US dollar. Also, capital is temporarily leaving the bond market to chase higher returns in equities. Any strategy has built in limitations, for this one it takes only a small increase in yields for the capital to return to bonds.
The exit of capital from sectors used by yield-focused investors is what creates opportunity, since the higher yields if solid, greatly minimize downside risks and most importantly provides for higher income. The tug of war between yields and values is highly evident in the Canadian preferred shares sector where the variable rate preferreds made another move higher in response to the Bank of Canada potential 25 basis point rate increase.
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