Maple money meets metal momentum

It turned out to be quite the busy week last week between the Bank of Canada meeting, the Federal Reserve announcement, a new Fed chair nomination from President Trump, and a sharp reset in precious metals. So, let's not waste any more time and let's get on with it and take these one by one. I'm Philip Peterson, Chief Investment Strategist at IG Welk Management. Join me each week as we discuss the trends dominating the investment landscape. It's the week of every second, so listen on as we navigate the living market. It wasn't much of a surprise that the Bank of Canada chose to pause on any change to its overnight rate. This is where we're going to start the conversation. This outcome had been well telegraphed in prior communication and was supported by recent Canadian economic data. That was near too hot, near too cold. Consensus among economists and strategists was near unanimous. As usual, though, we are less focused on the decision itself and more focused on what it tells us about the path ahead. The statement itself leaned decisively dovish in our opinion. The Bank highlighted geopolitical uncertainty, a softer labor market, and moderate growth expectations for 2026. Any lingering notion of rate hikes this year, we think can be put to rest. The message was clear. The Bank of Canada stands ready to respond if growth weakens further. This was not a hawkish pause. And it leaves open the possibility that we have not seen the end of this rate cutting cycle. We do believe we're going to get one more rate cut before the end of the year. Canadian rates remain restrictive enough to keep inflation anchored at the current level, but the bar to hike is rather high unless growth or inflation reaccelerates meaningfully. At the same time, should trade, shocks deep in or labor markets soften further, the Bank has clearly signaled a willingness to lean supportive. For investors, this reinforces a base case of a stable front end for interest rates, and a data dependent path, and markets that trade more on growth and trade headlines than on near-term policy moves. Looking at the Canadian dollar and the impact, the loony has strengthened beyond our expectations laid out in our 2026 outlook. From a strategy standpoint, nothing in the policy statement or monetary policy report materially alters our medium-term view. Recent strength in the currency has less to do with the Bank of Canada policy, and more to do with shifting sentiment toward the US dollar and broader US policy dynamics. Late last year, we outlined our view, our range for the Canadian dollar between $69.71 US. At time of recording, the Canadian dollar is trading near $73.00 US. Our fair value model, assuming two Fed cuts in 2026 and the Bank of Canada on hold, still implies roughly $71. However, the interest rate differential that has historically explained much of the US dollar's relationship with the Canadian dollar, as well as the euro, has begun to break down. Let me explain. Up until liberation day last April, the euro to the US dollar or the Canadian dollar to the US dollar, tracked the two-year yield spread almost perfectly. That is the difference in the Canadian two-year government bond yield versus the US. Similarly, the euro zone, general two-year yield versus the US, and we saw that relationship hold. This has been a pattern over the long term. However, more recently, that relationship has broken down. This is how it worked out. We saw an initial dislocation, a temporary re-anchoring in the fall, and then another parent break down over the past few weeks for the Canadian dollar. This is similar to what we saw for the euro starting liberation day. We would characterize us as a broader negative bias towards the US dollar. While the durability of the shift is uncertain, the breakdown in the traditional rate relationship warns an adjustment to our expectations. Perhaps we've seen a reset here, and this is what we're thinking. We are increasing our near-term Canadian dollar target to 71 cents US up to 74 cents, with risk modestly skewed to the upside. Now turning to the Fed. The Fed's first decision of 2026 felt like a rerun of its last decision of 2025. The policy rate was held at 3.5 to 3.75%. Inflation is still not fully back at target. It's a little bit above its 2% target there, but it's okay. The labor market continues to send mixed signals. With job opening softening but unemployment remaining relatively contained, with conviction low and risks too cited, the committee did what central banks often do in this environment. It stayed put and emphasized data dependence. Markets reacted accordingly with rate expectations barely moving. Our base case remains two Fed cuts in the back half of 2026. There were just cents in favor of a cut at this most recent meeting. A reminder that the internal debate is less about whether easing occurs and more about timing. Christopher Waller's descent carried a hint of political theater, a timely signal that he remained a serious contender in the succession conversation. That conversation, however, ended two days later. Jerome Powell now has a clear end date, and Kevin Worsh is set to take the helm. Worsh is often described as a "classic hawk." But that framing misses the nuance of his views. His core doctrine is less about tight money for its own sake and more about institutional credibility and regime design. His starting point is simple. Inflation is ultimately a central bank outcome. He has little patience for narratives that defuse responsibility across supply chains, geopolitics or fiscal policy. If markets believe that the Fed will defend price stability, inflation risk premium can remain contained and credibility holds. That credibility shows up directly in real rates, and currency. A Fed perceived as serious about its mandate tends to support the US dollar at the margin, by extension that same real rate dynamic works against assets that benefit from inflation head generatives, including precious metals. Where Worsh diverges from the standard hawk character, is in his preferred policy mix. He has argued for lower policy rates paired with a meaningfully smaller balance sheet. In practice, this implies less reliance on balance sheet-driven suppression of term premia and a greater emphasis on cleaner price signals from rates themselves. That makes leans towards a steeper yield curve, with some relief at the front end if cuts are delivered but less structural anchoring at the long end. Communication is another key pillar. Worsh is openly skeptical of heavy forward guidance and the obsession with near term data noise. He views policy makers as increasingly constrained by their own words and markets as prone to overfitting to stale signals. A regime with less guidance and more meeting by meeting discretion likely means higher rate volatility, more term premium, and a weaker Fed put through communication alone. Own driven asset rallies may become less reliable. For portfolios, the Worsh framework is credibility positive, guidance negative, and curves steepening friendly. It argues for value and quality over longer duration growth. And now Worsh's nomination also had an impact on precious metals. What we see is the sharp sell off in gold silver and other precious metals late last week was striking. The move was best understood as the intersection of macro repricing, stretch positioning, and market structure. From a macro perspective, the Worsh nomination prompted a modest repricing of real rates and the US dollar. Precious metals had benefited from a narrative built around policy, uncertainty, easing financial conditions, and declining real yields. As that narrative was challenged, even at the margin, the opportunity cost of holding non-yielding assets rose. That alone was enough to justify a pullback. But the magnitude of the move reflected more than fundamentals. Precious metals were already extended. Silver in particular had significantly outperformed gold, pushing the gold to silver ratio well below long run norms. This 1970 the average gold to silver ratio has been roughly 60 to 1, while estimates of relative cost production suggest a ratio of closer to 50 to 1, heading into last week that ratio had compressed meaningfully, signaling that silver had moved well ahead of both historical and fundamental anchors. Our own valuation work was also flashing yellow. Gold has historically exhibited a strong relationship with global money supply, particularly M2. While that relationship is far from perfect, it has been a useful long-term anchor. Recent price action had pushed gold more than one standard deviation above RM2 implied fair value, a level that historically coincided with periods of consolidation or correction rather than sustained upside. Market structure also played a role. Earlier changes to futures, margin frameworks, and elevated volatility increased leverage sensitivity. Modern prices began to fall, margin pressures, and forced deleveraging amplified what might otherwise have been a more orderly correction. To put a bow on it, macro news provided the catalyst, valuation and position created the vulnerability, and market mechanics accelerated the move. None of this undermines the longer term role of gold as a portfolio diversifier or store value. It does, however, argue for realism around near-term returns. When valuation overshoots, relative relationships stretch, and narratives become crowded. Corrections should not come as a surprise. Last week served as a reminder that even structurally supported assets can move sharply when regimes shift and positioning resets. That said, and to conclude, we continue to like gold and increasingly so following the recent pullback in price. I'm Philip Peterson, you've been listening to the Living Market podcast. If you've enjoyed this podcast, please take a moment to rate it or share it with colleagues and friends. It will help other like-minded individuals find us. Thanks for listening. The content of this podcast, including facts, views, opinions and recommendations, is not to be used or construed as investment advice and is not an offer or an invitation to buy or sell any security. The content of this podcast should not be relied upon for any purpose. An IG wealth management is not responsible for any reliance upon it. This podcast includes forward-looking information that reflects our current expectations or forecasts of future events. Forward-looking information is subject to risks, uncertainties, and assumptions that could cause actual results to differ materially from expressed herein. Our views are subject to change based on market conditions. Commissions, fees, and expenses may be associated with mutual fund investments. Read the prospectus before investing. Mutual funds are not guaranteed. Values change frequently and past performance may not be repeated.