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Amid the turmoil, a troubled Canadian dollar
Michael Babad

This article was published more than 8 years ago. Some information may no longer be current.

Briefing highlights

  • Canadian dollar could fall further
  • Loonie below 80 cents
  • Analyst sees 10% stock correction
  • Markets at a glance
  • Beneath the wage gains that sparked the rout
  • Toronto home sales fall
  • Canadian trade deficit widens
  • GM profit beats estimates
  • WestJet profit slides on fuel prices
  • BP profit climbs
  • Toyota boosts full-year forecast
  • Bitcoin falls below $6,000

Loonie could sink

Don't lose sight of the Canadian dollar amid the angst sweeping global stock markets.

The loonie is sitting at just below 80 US cents, and may well sink lower, analysts say, having been as low as 79.6 cents. There has also been a notable decline from where the currency sat, at abut 81.5 cents, at one point last week.

"The synchronized nature of the selloff will continue to feed into risk-sensitive currencies like CAD," said Mark McCormick, North American head of foreign exchange strategy at TD Securities, referring to the loonie by its symbol.

"Given the spike in volatility, the decline in stocks and the fall in oil, we look for another push higher in USDCAD, setting up a test of 1.2660.

By that, he meant a stronger U.S. currency versus the Canadian dollar, and a test of about 79 cents.

The U.S. dollar, of course, had been lagging until the stock selloff, which sent investors scrambling for safety. And the market is shifting minute by minute, with wild swings.

Mr. McCormick believes the market trouble "favours a rotation to the liquid safe havens" such as the euro and yen.

And in Canada, markets will watch for what Carolyn Wilkins, senior deputy governor at the Bank of Canada, has to say in a speech in Quebec this week.

"The selloff in equities is likely to kickstart a drop in global rates and hopes of looser policy, though we expect markets to remain skittish over the coming days," Mr. McCormick said.

"Wilkins' speech and data releases later this week also increase our bias to stay long USDCAD at the moment."

Where the selloff ends

Obviously we all want to know where the stock market selloff ends.

Jasper Lawler, for one, warns it's not over yet, but when all is said and done, the head of research at London Capital Group sees a 10-per-cent correction in the S&P 500 from the market peak.

"The indiscriminate selling will probably continue until Wall Street finds its first bottom," Mr. Lawler said in a research note today as Asian and European stocks sank and New York futures bounced around, with U.S. stocks climbing in the early going.

"For what it is worth, sentiment has improved from overnight pricing," he added.

Of course, Monday was a prime example of extreme uncertainty that led to ups and downs, the latter being where we ended. Sharply down, with losses of 4.6 per cent in the U.S. and 1.7 per cent in Toronto.

Analysts say the mayhem was sparked by inflation fears raising the prospect of the Federal Reserve hiking interest rates three or four times this year. That halted the record highs of markets, the sustainability of which observers had questioned, anyway. Now, it's all about where it all ends.

And it's going to take time to determine that.

He added later that it's still going to take some time to see where it ends.

"While we are trading off our lows, the speed of the recent declines has no doubt caught a few people out," said CMC Markets chief analyst Michael Hewson.

"It is also a reminder to complacent investors that markets can go down as well as up.

At this point, his advice for investors is to wait to determine how the market settles, and then take a cue from the new range.

"This fall in markets doesn't feel like it is over, and, as a result, we could well see further volatility."

Risk aversion is, of course, exceptionally high, RBC said.

"Our RAT (risk aversion thermometer) hit a two-and-a-half year high of 27 on Monday, more than three standard deviations risk averse, driven almost entirely by equity volatility, though [foreign exchange] volatility is now also picking up," said Elsa Lignos, RBC's global head of foreign exchange strategy in London.

"The last time it hit these levels was late August, 2015 (on the China 'deval')," she added.

"That time it took six weeks to turn risk-seeking again."

Like Mr. Lawler, IG chief market analyst Chris Beauchamp has a more opitimistic outlook.

"Much has been made of the absolute fall in point terms, but in percentage terms this would be a common or garden correction, and not the beginning of something bigger," Mr. Beauchamp said.

"A host of indicators, including market breadth, are at the kind of levels that signal short-term bottoms, suggesting that a bounce from here is entirely within the bounds of possibility."

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Where it all began

The market rout began Friday after a U.S. jobs report showed stronger wage gains of 2.9 per cent in January, suggesting inflationary pressures that would prompt the Fed to act more aggressively and sparking a spike in bond yields.

But Royal Bank of Canada says you have to look beneath the headline.

"Here is a dirty little secret of that much-touted wage gain - it was not broad based," Tom Porcelli, RBC's chief U.S. economist, and senior U.S. economist Jacob Oubina said in a report.

Indeed, they said, there were no annual wage gains among production and non-supervisory workers who account for 80 per cent of employment. They also pointed to the "volatility" of wages.

"Our view since the beginning of the year has been that our call for four hikes this year would become consensus both for the Fed and markets and that the conversation about the Fed would evolve into wondering if they would perhaps go even more than that/be more aggressive," said Mr. Porcelli and Mr. Oubina.

"This seems to have happened much quicker than we anticipated. But if the fear that has gripped the market since Friday is in part a result of the payroll report, then the fear is overdone."

Oh, that wealth effect

If you live in Toronto, there's not only the sliding markets to contend with.

Home sales in the region plunged 22 per cent in January from the record levels of a year earlier, the Toronto Real Estate Board said today.

The average price fell 4.1 per cent, though the MLS home price index, which is deemed a better measure, climbed 5.2 per cent, pushed up by condos, The Globe and Mail's Janet McFarland reports.

In Toronto's 416 area code, a detached home still goes for almost $1.3-million, that average price down 3.9 per cent from a year ago. And in the 905 area code, the average price of a similar home now stands at $879,048, down 12 per cent.

The Toronto area has been affected by the Ontario government's recent measures, and new nationwide mortgage rules from the commercial bank regulator, the Office of the Superintendent of Financial Institutions.

"It is not surprising that home prices in some market segments were flat to down in January compared to last year," said Jason Mercer, the group's director of market analysis.

"At this time, we were in the midst of a housing price spike driven by exceptionally low inventory in the marketplace," he added.

"It is likely that market conditions will support a return to positive price growth for many home types in the second half of 2018. The condominium apartment segment will be the driver of this price growth."

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Trade deficit widens

Canada's trade deficit is getting fatter, pushed higher by record levels of imports.

The gap widened in December to $3.2-billion from November's $2.7-billion as imports climbed 1.5 per cent and exports 0.6 per cent, Statistics Canada said today.

"That's toward the extremes of 2017 and the reason we've been persistent bears on the [Canadian dollar]," Nick Exarhos of CIBC World Markets said of the total shortfall.

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