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Briefing highlights

  • Bank of Canada and the loonie
  • Stocks, Canadian dollar, oil at a glance
  • Australian central bank cuts key rate
  • Required Reading

‘Rooting for the other team'

The Canadian dollar may be standing a little prouder these days, but watch for what happens when the Bank of Canada begins “rooting for the other team,” CIBC World Markets says.

What chief economist Avery Shenfeld meant by that is that the central bank won’t be able to stomach an appreciating currency amid hopes for stronger exports.

This comes after a period of gains sent the loonie nicely above 76 U.S. cents and sent Canadian dollar bears packing.

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It’s not that the loonie is particularly strong. It’s just stronger than it had been amid a softer U.S. dollar, higher oil prices and some economic data.

CIBC had projected a stronger loonie that would be followed by renewed softness. Indeed, Mr. Shenfeld noted in a report, the currency was early in reaching his 2019 target of just below 76.5 U.S. cents.

“We’re early in hitting that mark, so is there also a further road ahead for Canadian dollar gains before our medium term call for a weaker currency plays out?” Mr. Shenfeld asked.

Since the end of April, the loonie hasn't gained consistently against other major currencies.

Thus, "the market hasn't entirely been cheering on the Canadian dollar, per se," Mr. Shenfeld said.

"Instead, some of what we've seen has been the market booing the U.S. dollar."

Markets have been speculating over how far the Federal Reserve might go in cutting interest rates, possibly starting as early as this month. Some economists believe the market has gone too far, and that the Fed won't cut so aggressively, which could mean a turn higher for the U.S. dollar down the road.

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"Until that happens, dollar Canada could be carried a bit further, with at least a temporary flirtation a figure or so below 1.30," Mr. Shenfeld said.

That 1.30 means a Canadian dollar worth almost 77 U.S. cents. Looked at that way, below 1.30 means above that mark.

"Temporary, not only because of an eventual turn to less-dovish Fed expectations, but also because the applause on Canada will die off as we head into 2020," Mr. Poloz said.

"Canadian growth in the spring and summer quarters will benefit from a weak base of comparison after two quarters of near-zero growth. We look for a return to a much more temperate pace in Q4 and 2020."

Which is how you get to the Bank of Canada cheering on the other guys.

"A firming of the C$ might be just what’s needed to push the Bank of Canada into a token quarter-point cut in 2020, after the Fed has completed its 50-basis-point trimming," Mr. Shenfeld said.

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The Bank of Canada’s key overnight rate stands at 1.75 per cent, and some observers expect governor Stephen Poloz, senior deputy governor Carolyn Wilkins and their colleagues to trim it by one-quarter of a percentage point, a move that could dampen the currency.

Bank of Canada senior deputy governor Carolyn Wilkins and governor Stephen Poloz

Sean Kilpatrick/The Canadian Press

"While that will still fall a bit short of the eases now priced into the Canadian yield curve, the currency markets will take note of the evident Bank of Canada distaste for a steady loonie appreciation in an economy that needs more support from trade," Mr. Shenfeld said.

"It will be hard for markets to cheer on the Canadian dollar once the country’s own central bank starts rooting for the other team."

The loonie’s gains over the past while have prompted speculators shorting the currency to “run for cover,” Bank of Nova Scotia chief foreign exchange strategist Shaun Osborne and currency strategist Eric Theoret said in a report on the latest numbers.

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Markets at a glance

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Australia cuts key rate

Australia’s central bank cuts its key rate by one-quarter of a percentage point, saying the global economic outlook is still “reasonable” but uncertainty abounds.

“The uncertainty generated by the trade and technology disputes is affecting investment and means that the risks to the global economy are tilted to the downside Governor Philip Lowe said in a statement as the Reserve Bank of Australia trimmed its cash rate to 1 per cent.

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“In most advanced economies, inflation remains subdued, unemployment rates are low and wages growth has picked up,” he added.

“The slowdown in global trade has contributed to slower growth in Asia. In China, the authorities have taken steps to support the economy, while continuing to address risks in the financial system.”

It was the second straight cut by the RBA, and it “feeds into a global narrative of central banks looking set to embark on a new easing cycle, over concerns that the global economy is on the cusp of a sharp slowdown,” said CMC Markets chief analyst Michael Hewson.

These concerns over a weak inflationary outlook seem counterintuitive when looking at recent moves in commodity prices. Iron ore prices have continued their recent moves higher, now at a five-year high, while oil prices are also 20 per cent higher year to date.”

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Ticker

China to end limits

From Reuters: China will end ownership limits for foreign investors in its financial sector in 2020, a year earlier than scheduled, Premier Li Keqiang said Tuesday. China will also further open its manufacturing sector, including the auto industry, while reducing its negative investment list that restricts foreign investment in some areas, Mr. Li told the World Economic Forum in the northeastern Chinese port city of Dalian.

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Germany fines Facebook

From Reuters: German authorities have fined Facebook US$2.26-million for providing a distorted picture of the amount of illegal content on the social media platform, a violation of the country’s law on internet transparency.

AB InBev aims for $9.8-billion

From Reuters: Brewing giant Anheuser-Busch InBev NV is seeking to raise up to US$9.8-billion by listing its Asia-Pacific business in Hong Kong, marking what would be the world’s largest initial public offering this year.

Required Reading

Genworth studies sale

Mortgage insurer Genworth Financial Inc. is considering spinning out its large Canadian subsidiary after Ottawa raised national-security concerns about a sale of the entire company to a Chinese conglomerate. Tim Kiladze reports.

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Cannabis clash

A lack of scientific research on cannabis impairment is driving a rift between employers and workers, particularly in safety sensitive industries, as some unions argue that overly cautious policies amount to an outright ban on the drug, Alexandra Posadzki writes.

EDC scrutiny

A federal review of Export Development Canada has exposed serious shortcomings at the Crown corporation, noting its disclosure practices fall far short of other financial institutions, and that the agency is not legally obligated to consider the environmental or human-rights impact of the financial support it provides to exporters. Matthew McClearn reports.

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