Skip to main content

Briefing highlights

  • Loonie at mercy of Trump's first 100 days
  • Analysts expect Canadian dollar to slump
  • CMHC to raise mortgage insurance premiums
  • Global stock markets slide
  • BAT strikes deal for the rest of Reynolds

‘Skewed to the bearish’

The Canadian dollar will soon be at the mercy of Donald Trump’s first 100 days as U.S. president.

No one can predict what will happen with any certainty because of the lack of any certainty surrounding Mr. Trump’s fiscal and economic programs.

But most analysts expect the loonie to fall.

As JPMorgan Chase puts it, the risks to the Canadian dollar from developments in the United States are “firmly skewed to the bearish side.”

It’s not just how the U.S. dollar fares after Mr. Trump takes office. Everything is in play, from economic growth to inflation and interest-rate expectations and, most importantly, trade.

It’s the latter that has everyone wondering. While Mr. Trump’s threats have been largely aimed at China and Mexico, Canada can’t help but be caught up in the new administration’s trade policies.

And, lest we forget, there are the usual suspects such as oil prices and Bank of Canada policy.

“While the incoming news and information are mixed, we see a likely still dovish BoC, rich pricing, benign positioning, and most importantly collateral risks from U.S. trade policy in the first 100 days of the incoming Trump administration all skewed for more CAD weakness in the coming months,” said Daniel Hui and Niall O’Connor of JPMorgan.

“Trump has not directly mentioned Canada, but trade policy of the incoming administration is still a very significant risk,” they added in a recent report in advance of Friday’s inauguration.

“It is true that Canada is not a target of the president-elect’s trade rhetoric. But this does not mean that Canada would be immune from potential U.S. policy once the new administration takes office.”

Crucial here are the administration’s plans for the North American free-trade agreement, which Mr. Trump has demanded be renegotiated or even killed, and Republican proposals for a “border adjustment tax” that could wound Canada. Border taxes such as Canada’s GST on imports are already a hot-button issue for Mr. Trump’s team.

“This could come as a key element of the renegotiation of NAFTA, or as part of the U.S.’s own adoption of a border adjustment regime as part of comprehensive tax reform,” said Mr. Hui and Mr. O’Connor.

“Discussions on both trade deal renegotiation and tax reform could begin within the new administration’s first 100 days.… For an economy for whom 77 per cent of exports are shipped to the U.S., and who has been struggling with a post-commodities supercycle rebalancing process, any disruption from U.S. trade policy would be a significant negative macro shock.”

The loonie has bounced up and down since Mr. Trump won the November election, and analysts generally expect it to erode to between about 70 cents (U.S.) to 72 cents from its current level around the 76-cent mark.

JPMorgan now sees the loonie at just shy of 71 cents by mid-2017, picking up to 72.5 cents in the second half the year. Some see it falling even further.

The loonie was above 76.5 cents by mid-morning as the U.S. dollar sank again.

Paul Ashworth, the chief North American economist at Capital Economics, said the Canadian dollar should actually change little, ending the year at about 77 cents, all things being equal.

All things being equal is a key factor for Mr. Ashworth, given the lack of clarity surrounding Mr. Trump’s plans. But a border adjustment tax could be a biggie.

“That would put upward pressure on the price of imported goods in the U.S. and downward pressure on U.S. export prices which, together, would push the U.S. dollar higher,” Mr. Ashworth said.

“In the extreme, a 20-per-cent border-adjusted corporate tax could generate a 20-per-cent to 25-per-cent increase in the trade-weighted U.S. dollar, which would push the Canadian dollar down to below $0.60,” he added.

“We are skeptical that the U.S. dollar would increase by quite that much, however, particularly not in the first 12 months. Nevertheless, if Congress did pass what would be a revolutionary change in the nature of U.S. corporate tax, the Canadian dollar would undoubtedly weaken from current levels and possibly quite substantially.”

Capital Economics believes the proposal will die, a victim of trade lobbyists. But, then again, “we also thought that Hillary Clinton would win last year’s election,” said Mr. Ashworth.

As for actual trade, Ontario and New Brunswick would be hit hardest by such a tax, said Warren Lovely, National Bank’s head of public sector research and strategy.

“No province should be cheering the emergence of a more inwardly focused/protectionist U.S. administration, but for some, the successful diversification away from the U.S. – British Columbia has done the best job here – or a much greater reliance on low-elasticity sectors like energy/metals/minerals – the three oil-producing provinces come to mind – could significantly blunt the fallout,” Mr. Lovely said.

“Let’s hope this comes to nothing, but as is the case with any number of economic, fiscal, financial metrics, not all provinces are created equal,” he added.

“Alberta’s economy has had a tough go of late, but here’s one area where it’s relatively better positioned, as the province’s crude will likely continue to flow southbound with or without a border tax.”

One thing is clear: Markets can expect world currencies to be in flux after Mr. Trump goes to Washington.

“In the immediate wake of the elections in November, markets latched onto a Trump policy narrative that primarily focused on the reflationary aspects of the president-elect’s campaign rhetoric, but downplayed many other potential aspects of the new administration’s broader platform,” said JPMorgan’s Mr. Hui and Mr. O’Connor.

“Markets may be currently in the process of a substantial reassessment of Trump’s approach towards economic policy following a disappointing first press conference in which the president-elect passed on the opportunity to comment on tax cuts, infrastructure spending, or deregulation (the core pillars of the ‘Trumpflation’ market narrative).”

Indeed, the U.S. dollar slumped after that news conference, sending the Canadian dollar up to almost 77 cents at one point.

“He instead focused on a multitude of political issues, but also highlighted more confrontational approaches towards economic policy, including border adjustments and punishment of firms engaged in production offshoring,” Mr. Hui and Mr. O’Connor said.

“Certainly the inauguration address on Jan. 20 is an even more significant opportunity for Trump to present his vision and policy priorities, and thus for the market consensus to recalibrate baseline policy assumptions, while policy actions in the first 100 days will be continually benchmarked against market consensus expectations.”

CMHC raising premiums

Canada Mortgage and Housing Corp. is raising mortgage insurance premiums for home buyers, The Globe and Mail’s Tamsin McMahon reports.

“We do not expect the higher premiums to have a significant impact on the ability of Canadians to buy a home,” said Steven Mennill, CMHC’ senior vice-resident of insurance, in a news release.

“Over all, the changes will preserve competition in the mortgage loan insurance industry and contribute to financial stability.”

The changes reflect stricter new capital requirements for mortgage lenders that the Office of the Superintendent of Financial Institutions introduced at the start of the year. The measure takes effect March 17.

BAT wins Reynolds American

British American Tobacco PLC is struck a sweetened deal to take full ownership of Reynolds American Inc.

The almost $50-billion (U.S.) cash-and-stock agreement, which will give BAT the 58 per cent of Reynolds it doesn’t already hold, will bring together the Newport, Kent and Pall Mall brands, among others, and create a company “with a world class pipeline of vapour and tobacco heating products,” BAT said.

The companies expect to save at least $400-million in annual costs by the end of the third year of their marriage.