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Briefing highlights

  • Rosenberg on the loonie
  • Behind Alberta’s oil plunge
  • RBC profit climbs in fourth quarter

Rosenberg’s loathsome loonie

David Rosenberg has 10 reasons to hate the loonie.

Daniel Hui and Patrick Locke also have some not-nice things to say about the Canadian dollar, but only into early next year.

Their comments come as the currency dips to near 75 US cents, swayed for some time by oil prices and market speculation over the Bank of Canada’s path for raising interest rates.

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Mr. Rosenberg, chief economist at Gluskin Sheff + Associates, told clients in one of his daily reports this week that there are “10 reasons to hate the loonie.”

Here’s why he thinks the currency won’t rise much from here:

1: “Canada’s current account deficit is running at a near-record $64-billion at an annual rate, around 3 per cent of GDP, and has not been in balance since the third quarter of 2008.”

2: Foreign direct investment has had a net deficit for 10 of the last 11 quarters.

3: Productivity in the business sector has been flat on an annual basis, while up 1.2 per cent in the United States.

4: Unit labour costs expressed in U.S. dollars have been rising by 7 per cent, year over year, compared with 1.5 per cent in the United States.

5: The combined federal-state U.S. corporate tax rate has eased to 25.8 per cent from 38.9 per cent before American reforms. In Canada, the federal government eased up on taxes in the recent fiscal update. As for that rate, which is a percentage point below what Ontario businesses pay, “Ottawa could have addressed this, but instead chose to raise program spending $6-billion annually above the baseline projection, an amount that could have funded a three-point decline in the top marginal corporate income tax rate.”

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Photo illustration

6: Commodity markets, on which Canada is so dependent, have fallen to levels of more than a year ago.

7: “The Liberals have reclaimed a 10-point lead over the Conservatives in the most recent polling.” (No, Mr. Rosenberg does not hide his feelings.)

8: Short-term interest rates are below those in the United States, and that’s probably not going to change in the near-term.

9: Capital spending in the U.S. accounts for 6 per cent of gross domestic product. In Canada, it’s just 4 per cent.

10: Residential construction is a huge component of GDP, and way above that in the United States. “In other words, Canada subsidizes a non-productive asset (housing) and we therefore have too much of it. And we don’t have enough business investment because we don’t seem to have a government who understands that this is the bedrock for economic activity.”

For their part, Mr. Hui and Mr. Locke, currency strategists at JPMorgan Chase & Co., don’t see political issues greatly affecting the loonie. Indeed, next year’s federal election “doesn’t look poised to offer any chance of surprise outcomes,” they said in an outlook for the Canadian dollar.

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“Fringe party polling is negligible, with no clear anti-establishment personalities gaining traction,” they added.

Even the New Democratic Party “are on pace to win just 6 per cent of parliamentary seats,” Mr. Hui and Mr. Locke said.

“Thus, for now, the outcome looks to be well within the conventional boundaries of Canadian establishment politics.”

There are, of course, issues with oil, notably the low price of Western Canada Select, a benchmark well below the levels of West Texas intermediate and Brent crude.

The loonie is tied somewhat to oil, and the outlook can be critical for the currency’s value.

“The biggest risk in 2019 is that [local crude prices below US$20 a barrel] are sustained, and trigger a much bigger negative spillover into the broader economy than we expect,” Mr. Hui and Mr. Locke said.

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They project WCS will recover toward at least US$30 a barrel, and thus become less of a threat to the country and a factor for the Bank of Canada.

“But a large WCS-WTI discount will likely linger for some time, and we factor in a modest risk premium for early 2019 in the forecasts.”

Another big factor, of course, is how aggressive the central bank is in raising interest rates, particularly compared with the pace of the Federal Reserve, its U.S. counterpart.

“We expect 2019 will be similar to 2018 insofar that the main driver is the extent to which BoC will maintain pace with the Fed, and thus continue to confine USD/CAD to a sideways range,” the JPMorgan strategists said, referring to the U.S. versus Canadian dollar by their symbols.

Mr. Hui and Mr. Locke projected the loonie would continue weak into early next year, bottoming in the first quarter at just above 75 US cents. But it will gain traction after that, ending 2019 at just shy of 79.5 US cents.

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The Alberta plunge

The focus of Alberta’s oil price troubles has been on Western Canada Select. But, notes The Globe and Mail’s Matt Lundy, other benchmarks, which account for about 40 per cent of Canadian production, are suffering, too.

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RBC profit climbs

Royal Bank of Canada posted a 15-per-cent jump in fourth-quarter profit to $3.25-billion, with earnings per share up 17 per cent to $2.20 from a year earlier.

Return on equity rose a percentage point to 17.6 per cent, the bank said today.

RBC posted stronger results in its insurance, personal and commercial banking, and investor and treasury services businesses, but reported lower results in wealth management and capital markets.

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