Happy New Year!
As we start the new year, I think this is a good time to look at what 2013 holds in store for our currency, interest rates, and the economies of the world.
Europe will continue to struggle economically for 2013, and although the worst seems to be in the past, the potential for additional turmoil remains. Greece, Italy, and Spain are still weak points in the European economy and their recoveries should be watched closely. If the US recovery gains momentum, the potential for increased exports from Europe provides hope for a faster European recovery.
China appears to have turned the corner and is expected to lead the major economies in growth over the next year. As one of the two largest world economies, this is positive news for the global economy and especially commodity based economies such as Canada.
The fiscal cliff in the US has dominated the business news for the past month as US politicians demonstrated that the two parties are still not able to work together for the common good of the nation.
Although a last minute short-term solution was enough to make the markets happy, the large fiscal cliff has been replaced with a number of slightly smaller “fiscal drop-offs”. Political bickering will continue as debt-ceiling limits, expiring tax cuts, and government spending restrictions come up for debate over the next year. Last minute solutions to these deadlines will probably be found although both parties will wring out the maximum amount of drama possible from each situation. Since the US economy represents about 25% of the global economy, a great deal depends on the continued momentum of the US recovery.
Fixed term interest rates should remain relatively stable over the next year. We may see increases of up to 0.50% depending on a number of factors but 5 year terms should still be available at less than 3.65% by the end of the year. Even if the fixed rates do increase slightly, they will still be near historic lows and should entice buyers to jump into the market. Existing mortgages coming up for renewal in 2013 will definitely see a huge reduction in interest rates compared to the rates that were obtained 4 to 5 years ago.
The Prime rate will likely see an increase of 0.25% by the end of 2013, with a slight possibility of a 0.5% increase, and the differential from Prime for variable rate mortgages will likely maintain the status quo. The days of Prime less 0.90% are a distant memory as current variable rate mortgages are ranging from Prime less 0.30% to Prime plus 0.30%. This low spread between variable rates and fixed rates and drive more consumers to take the fixed option.
The Canadian dollar will see continued volatility in value against the US dollar in 2013. As the US economic/political debates continue, weekly movements of half a cent to two cents will probably be the norm. The Canadian dollar should gain strength from improving Chinese and US prospects and will likely range between $0.98 and $1.04 for most of the year. However, the regular large movements in the value will provide opportunities for spot trades by those looking to take advantage of the volatility.