Briefing highlights
- Forecasts for the Canadian dollar
- A Maxime Bernier scene I’d love to see
- Markets at a glance
- Home sales rise for fourth month
- What else to watch for this week
- Aurora up on reports of talks with Coke
Whither the loonie
Recent forecasts for the Canadian dollar aren't for the squeamish.
It’s not even so much the projected levels of the currency, though that’s certainly a factor, as it is the big differences in the outlooks, which can complicate your life if you’re trying to plan ahead.
Here, for example, are two of the latest projections, which highlight the divergence among those who forecast:
CIBC World Markets puts the loonie at just shy of 76 US cents by the end of the year, while Société Générale sees it topping 79.
Early next year is where it really widens: CIBC forecasts the currency at shy of 76.5 US cents in the first quarter, while Société Générale projects it will jump above 81 by next March.
Ready for what comes next? CIBC expects the loonie to perk up by mid-2019, but then sink to end the year at above 74.5. Its economists then see the currency moving up to just below 76 US cents in the second quarter of 2020, then ending that year just shy of 77.
Société Générale doesn’t forecast that far out, but the bank does put the currency at almost 82 US cents by mid-2019 and almost 83.5 by next September.
Trying to peg the value of a currency can tie an exporter or importer in knots, particularly those who haven't hedged their bets.
Not to mention Canadians planning a vacation south of the border or anyone else who has to pay certain costs in U.S. dollars.
It’s particularly troublesome now because the loonie has been bouncing around on every twist and turn in negotiations to reach a new North American free-trade agreement. The United States struck a deal with Mexico and is now trying to bring Ottawa on board, seemingly with little success, and threatening to impose hefty tariffs on Canadian auto exports if it doesn’t.
Also playing into this are projections for interest rates in the United States and Canada. The Federal Reserve is in the middle of a rate-hiking cycle, as is the Bank of Canada. But there’s a crucial difference between the central banks, that being that the Bank of Canada could be thrown off course by NAFTA developments.
Higher rates are loonie-friendly, and economists believe Bank of Canada governor Stephen Poloz, senior deputy Carolyn Wilkins and their colleagues will raise their benchmark next month.
Bank of Canada senior deputy governor Carolyn Wilkins and governor Stephen PolozPATRICK DOYLE/The Canadian Press
CIBC chief economist Avery Shenfeld and his colleague Katherine Judge believe a NAFTA deal would give the Canadian dollar only a short-term lift, and thus their lower forecasts.
"The C$ has been stuck in the mud of late, but positive developments on the trade front could be a catalyst for a very short-lived move to the strong side," Mr. Shenfeld and Ms. Judge said in their outlook.
"Investors are awaiting confirmation of a NAFTA deal, something we expect to materialize in the next few weeks," they added.
"While we could briefly visit 1.28 dollar-CAD territory on a NAFTA announcement and a follow-up Bank of Canada rate hike in October, and again as the USD generally weakens the first half of 2019, we still see that as the strong end of the likely range for the Canadian dollar in the coming two years."
They were referring to the Canadian and U.S. currencies by their symbols, with that 1.28 translating to a loonie at just above 78 US cents.
Ah, but ...
“Any new NAFTA is likely to represent more 'give” than ‘take’ in terms of what it means for Canada’s trade balance," said Mr. Shenfeld and Ms Judge.
"A much longer-term trend of mediocre real export performance going all the way back to 2000, and a persistent current account deficit since the recession, suggest that, if anything, the loonie will have to be weaker over the longer term to allow exports to play a greater role in growth if housing pulls back as a driver."
Foreign Affairs Minister Chrystia Freeland at NAFTA talks in WashingtonCarolyn Kaster/The Associated Press
Société Générale, in turn, also expects a NAFTA deal, and our “forecasts assume one is forthcoming and allows the Canadian dollar to gain against a slowly weakening U.S. dollar.”
JPMorgan Chase strategists believe the uncertainty surrounding NAFTA will run through to the end of this year, with an actual resolution in the first half of 2019.
Whether talks succeed or collapse will probably spark a “knee-jerk” move in the loonie of more than 4 per cent, either up or down depending, said JPMorgan global foreign exchange strategist Daniel Hui and his colleague Patrick Locke.
"A quick and successful resolution to NAFTA would likely trigger both a repricing of the BoC (based on expectations of a pent-up investment-led cyclical boost), along with a boost from sentiment that could see CAD upside around 4 per cent," Mr. Hui and Mr. Locke said.
By "repricing," they mean factoring in what a deal might suggest for the Bank of Canada's timeline as it continues to bring interest rates back from the crisis-era and oil shock lows.
"On the other hand, a Canada-negative scenario (a follow-through of threats to impose auto tariffs, realization of a [US.-Mexico] bilateral agreement plus cancellation of legacy NAFTA as a negotiation threat) could cause the market to de-price the BoC and return 2-per-cent-plus risk premium, for a net effect of 5- to 8-per-cent weakness," they added.
"Finally, a continued muddle-through would likely fail to trigger strong moves in either direction, which would leave USD/CAD stuck in the recent 1.29-1.32 range where BoC pricing is capped."
Those numbers translate to 77.5 and 75.8 US cents, respectively.
Of course, a stronger loonie can complicate life for Canadian exporters. And, remember, the Bank of Canada is counting on exports to help buoy the economy as consumers pull back amid higher interests, and the housing market pulls back from the heady days.
"As a result, governor Poloz will be hesitant to keep pace or exceed U.S. rate hikes and risk strengthening the C$," said CIBC's Mr. Shenfeld and Ms. Judge.
"A wider rate differential with the U.S. should help reverse gains in CAD over the second half of 2019," they said, adding that "even as the U.S. moves to ease monetary policy come 2020, export headwinds in a slowing global growth environment should see dollar-Canada in the low 1.30s range."
That 1.30 means about 77 US cents for the loonie.
Read more
- A prayer for the loonie
- ‘Canada, you’re fired’: Canadian dollar has a lot riding on NAFTA as Ottawa in a squeeze play
- David Rosenberg: Why I’m skeptical of the latest Canadian dollar rally
- Bullish and bearish scenarios as Canadian dollar now ‘more vulnerable to NAFTA crunch time’
- Scott Barlow: Global analyst calls top-performing loonie a ‘moose on the loose'
- Why this economist warns the loonie will slump to 70¢ next year, even if NAFTA’s resolved
A scene I’d love to see
“It was the best we could do on short notice. If you’ve got a better name for the party, let’s hear it.”
Photo illustration
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Markets at a glance
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Home sales rise
Canadian home sales are now up for the fourth month in a row as many markets rebound from the combination of new mortgage rules and rising interest rates.
Vancouver is still suffering, about half the markets across the country chalked up sales gains in August from a month earlier, the Canadian Real Estate Association said.
Sales rose 0.9 from a month earlier, though were down 3.8 per cent from a year earlier.
Average prices climbed 1 per cent from August, 2017, and MLS home price index, which is considered a better measure, rose 2.5 per cent.
Read more
- Home sales rise between July and August
- House price inflation in Canada suddenly trails that of 36 other countries
- Janet McFarland: Toronto housing sputters back to life as prices, sales grow in August
- Brent Jang: Vancouver housing sales hit six-year low in August
- How $8-billion in added mortgage costs will squeeze Canadians and the economy
- ‘Cue the comeback’: The reawakening of many Canadian housing markets
- Canada’s housing market scores first annual price gain in months
- ‘Good value for your money’: How downtown condo prices in Canadian cities compare globally
- Carolyn Ireland: Sale by trial and error in Toronto’s housing market
What to watch for this week
TUESDAY
Canada's manufacturers are expected to see another month of rising sales.
Economists project Statistics Canada's monthly report in the sector will show shipments up somewhere between 0.3 and 1 per cent in July.
CIBC's Royce Mendes, for example, expects a gain of 0.4 per cent.
"That said, we’ll likely see shipments having grown almost 10 per cent over the past year, and with revisions to capacity utilization data now showing a bit more elbow room to expand, momentum in the factory sector could reaccelerate following a brief slowdown."
Watch, too, for quarterly results from General Mills Inc. and AutoZone Inc.
WEDNESDAY
The Bank of Japan isn't expected to do much of anything.
"The Japanese economy is showing some signs of improvement, with GDP growth at its best levels since 2015, however prices still remain well short of the central bank's inflation target, which means that any significant change of tone remains highly unlikely at this week’s meeting," said CMC Markets chief analyst Michael Hewson.
And given the world's focus on trade in the Trump era, it will also be worth watching Japan's latest numbers.
"The trade balance probably slipped deeper into the red in August, which would support our view that net trade remained a drag on the economy in Q3," said Marcel Thieliant of Capital Economics.
Markets will also be watching to see how U.S. housing starts and building permits fared in August, the former expected to show an August annualized increase of about 5 per cent, and the latter a drop of 0.2 per cent.
THURSDAY
There are a handful of secondary economic reports, but "all eyes will be on the informal EU Summit in Salzburg on Thursday for progress in the Brexit negotiations," said Oliver Allen of Capital Economics.
FRIDAY
There's suddenly a bit more focus on inflation after the annual rate spiked to 3 per cent in July.
Economists expect the August report from Statistics Canada to show annual inflation easing to somewhere between 2.5 and 2.9 per cent. Remember that the Bank of Canada has said the recent highs are the result of temporary factors.
"The prior month’s spike was driven by upswings in airfares and, to a lesser extent, in travel tours and telephone services," said economists at Toronto-Dominion Bank, who believe this report will highlight a "significant correction" where airlines are concerned.
"Energy prices are also a net negative this month (led by lower gasoline prices), and we also see scope for a moderation in food prices," they added.
“So far, price impacts from Canada’s retaliatory tariffs s have been negligible, but the categories to watch are food items, household appliances, personal care products and vehicles.”