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business briefing

Briefing highlights

  • No longer the ‘best dollar’
  • Global markets tumble on coronavirus
  • Blockades to hit growth
  • Key this week

‘Best dollar’ no more

A major foreign bank no longer expects Canada’s loonie to be the “best dollar” this year.

Société Générale was referring in a revised forecast to the loonie against the Australian and New Zealand dollars, and how the currencies will fare against the U.S. greenback.

Global fixed income strategist Kit Juckes and his colleague, foreign exchange derivatives strategist Olivier Korber, revised their projections because U.S. economic outlooks have been better than expected and, notably, the yen and other Asian currencies have been affected by the coronavirus.

"Trade-sensitive currencies should recover at the margin, given alleviated bearish risks concerning the Chinese yuan," Mr. Juckes and Mr. Korber said.

"The CAD is no longer expected to be the ‘best dollar,' but only see modest performance against the greenback. Antipodeans dollars should see modest resilience, with the AUD still outperforming a standstill NZD."

They were referring to the three currencies by their symbols.

Mr. Juckes and Mr. Korber projected the loonie will be at about 75.8 U.S. cents in the second quarter, ending the year at almost 77 US cents and picking up another half cent in the first three months of 2021.

Bank of Montreal chief economist Douglas Porter noted that the Canadian and Australian dollars had been "nearly inseparable" for about eight years until mid-2018, when the latter "began to sag sharply" while the former held its own.

This came as Australia’s central bank became “an early and enthusiastic leader of the rate cut parade,” trimming its benchmark, as did others, while the Bank of Canada held firm.

The Australian dollar has suffered of late because of China’s coronavirus-related economic challenges and Australia’s trade connections, sinking again today, which obviously could affect how forecasts play out.

In its latest forecast last week, CIBC World Markets projected the loonie will weaken after a “short-lived rally,” sliding to 73.5 US cents in the fourth quarter.

“The recent global risk-off environment, driven by fears surrounding the coronavirus, has seen the flight to safe haven assets and a depression in oil prices,” economic analyst Taylor Rochwerg said in her forecast.

"But, if fears abate and sentiment eventually improves in the next few months, oil prices should rebound and the loonie will likely be dragged along for the ride."

Given that, the loonie should close out the first quarter "slightly stronger" than where it is now.

"However, that rebound will likely be short-lived, as softness in GDP growth continues and strength in the labour market wanes accordingly," Ms. Rochwerg said.

"Moreover, that will likely be compounded by the repercussions of the coronavirus on global supply chains and production, and potentially current rail disruptions. That could be enough reason to see the Bank of Canada cut interest rates by 25 basis points in April."

Coronavirus issues would affect the Australian dollar, too, but a rate cut by the Bank of Canada, which some observers expect at some point, would also soften up the loonie.

Also affecting the Canadian currency will be the strength of the U.S. dollar, and observers expect it to remain buoyed by global uncertainties.

"The USD should remain upbeat but looks vulnerable over the next two weeks on month-end and U.S. political risks," said Mark McCormick, global head of foreign exchange strategy at TD Securities.

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Stocks sink

Stocks are tumbling across the globe as the toll from the coronavirus mounts.

Economists revise forecasts

Analysts are marking down their projections for economic growth in the wake of the rail blockades.

“Rail blockades could reduce Canadian GDP growth by 0.2 of a percentage point in Q1/20, potentially more if a resolution isn’t found soon,” Royal Bank of Canada senior economists Nathan Janzen and Josh Nye said in a recent forecast.

"The disruptions add to a growing list of transitory or one-off factors that have impacted Canada’s economy," they added.

"Economic activity should eventually rebound from temporary factors, but downside surprises are more likely at this stage in the economic cycle."

Stephen Brown, senior Canada economist at Capital Economics, in turn projected the blockades will eat into February GDP to the tune of 0.25 per cent even if they end soon.

“Growth should at least get a similar-sized boost in March – assuming the blockades are lifted – but the combined effects of the weaker [economic] data and the protests suggests that growth will be closer to 1.5 per cent annualized in the first quarter of the year, rather than near 2 per cent as we had previously assumed.”

BMO's Mr. Porter also cited the mounting toll.

"Many initially pointed to the eight-day CN strike last November as a recent example: A 4-per-cent drop in rail activity that month directly cut GDP by much less than 0.1 per cent," he said.

"But because of its lengthier nature, and with no immediate end in sight, the blockade may be a bigger drag."

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Key this week

It's largely about the economy and the commercial banks.

Where the former is concerned, analysts expect Statistics Canada to report lame economic growth in the fourth quarter.

As CIBC senior economist Royce Mendes put it in his lookahead to Friday's report, "Canada's economy didn't exactly ride into the new year in style."

Expect to see annualized growth of about 0.2 or 0.3 per cent, a sharp slowdown from the third quarter's 1.3 per cent.

"It’s true that there were some idiosyncratic forces at play: an auto strike south of the border (which affected Canadian supply chains), a rail strike here at home, a pipeline disruption and challenging weather conditions," Mr. Mendes said.

"But, a cooling in household spending has been the most concerning aspect of the economic slowdown, which was unlikely materially affected by those forces, and has been ongoing since at least the second quarter of 2019."

As for the commercial banks, they speed up their reporting of financial results this week after Royal Bank of Canada’s strong quarter last week.

"Bank earnings season kicks into high gear and will set much of the tone for the TSX given that banks have a 21-per-cent weight in the index," said Derek Holt, Bank of Nova Scotia's head of capital markets economics.

We’ll also get a couple of provincial budgets, from Alberta and Nova Scotia.

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