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Briefing highlights

  • Canadian dollar slumps to 76 cents
  • The ‘boogeyman’ tariff threat
  • Trump slaps tariffs on China
  • A cannabis road sign I’d love to see
  • Markets at a glance
  • CREA cuts home sales forecast
  • Manufacturing sales decline
  • Canada Goose posts surprise profit

Canadian dollar slumps

The Canadian dollar is now worth less than 76 US cents, and may well have another penny to go in its current slump.

The loonie is being haunted by several ghosts, including a stronger U.S. dollar, worrisome trade developments and the different paths of the Canadian and U.S. central banks. Not to mention a weaker Canadian manufacturing report today.

The Bank of Canada is sitting on the sidelines while the Federal Reserve takes interest rates higher and the European Central Bank winds down its stimulus program.

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Trade is a moving target, as negotiations to remake the North American free-trade agreement stall, global tensions mount and the possibility of fresh tariffs on Canadian auto imports to the U.S. looms.

“We also note that CAD remains one of the most risk-sensitive currencies in the G10, leaving it at risk from policy divergence and global macro volatility,” said Mark McCormick, North American head of foreign exchange strategy at TD Securities Inc., referring to the loonie by its symbol.

“Our gauge … is showing increasing signs of global macro stress, and market fears that Trump may scrap NAFTA seem to be rising by the day,” he added.

“The trade barbs with China don’t help either, especially as equities look skittish into the weekend. The momentum leans against the loonie, and the break of the trendline and recent high in [the U.S. vs. Canadian dollar] argues for a push toward the June, 2017, highs around 1.3350.”

Flipping that around would put the loonie at just shy of 75 US cents.

In its latest outlook this week, Royal Bank of Canada projected the currency at about 78 US cents later this year.

“Canada’s dollar faces conflicting impulses from the recovery of oil prices and the recent widening in short-term interest rate differentials vis-à-vis the U.S,” RBC said.

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“A change in sentiment about the outlook for Canada-U.S. trade has influenced the currency’s direction,” the bank’s economists added, projecting the currency will stay “within” its recent range.

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The boogeyman

Boogeyman or bogeyman

A monstrous imaginary figure used in threatening children

— Merriam-Webster

Whether or not the Trump administration follows through, Canadian governments and businesses can expect to be stalked by the “boogeyman” that is the threat of auto tariffs.

This comes as the U.S. today announced 25-per-cent tariffs on US$50-billion in goods from China, ratcheting up trade tensions ever further.

“These tariffs are essential to preventing further unfair transfers of American technology and intellectual property to China, which will protect American jobs,” President Donald Trump said in unveiling the move.

“In addition, they will serve as an initial step toward bringing balance to the trade relationship between the United States and China.”

Here’s the thing: Observers don’t expect the Trump administration to actually slap crippling tariffs of 25 per cent on auto imports, though the threat alone is enough to sow doubt and angst.

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“The entire North American auto sector would be hurt badly, with Japan and Europe also seriously affected,” warned Eric Lascelles, chief economist at RBC Global Asset Management.

“To the extent that the auto sector has played a disproportionate role in U.S. trade negotiations so far, this threat cannot be dismissed,” he added.

“All the same, it would prove so unpopular domestically that it seems a stretch. We instead view it as a boogeyman to be trotted out regularly whenever the U.S.’s negotiating partners step out of line.”

Like Mr. Lascelles, other observers expect no full-blown tariff war. Of course, how many expected the steel and aluminum tariffs? Or that Mr. Trump would be elected in the first place? Or that Brexit would happen, for that matter?

As The Globe and Mail’s Justin Giovannetti, Greg Keenan, James Bradshaw and Steven Chase report, Canadian businesses are fretting about the impact of a tariff war with the United States. The threat of hitting the auto sector, which employs about 130,000 people in assembly and parts, is the latest and most worrisome.

This comes amid troubled negotiations to overhaul the North American free-trade agreement and follows the high-profile attack on Prime Minister Justin Trudeau by President Donald Trump and his officials.

“If such comments are taken at face value, the trade environment is in serious trouble,” Mr. Lascelles said.

“Fortunately, there is likely some exaggeration to them.”

He noted that Mr. Trump is “notoriously sensitive to criticism,” and that the President “usually finds another target quickly,” and that his own team admitted it wanted a “show of strength” before the summit with North Korean leader Kim Jong-un.

Importantly, too, is that Americans would probably “sour quickly” amid an actual tariff war.

“Thus, in the run-up to the November midterm elections, the trade threats may continue to come even as actual tariffs tend to be a bit scarcer on the ground,” Mr. Lascelles said.

“This could get to the point that the U.S. triggers the NAFTA withdrawal process (though the six-month cooling-off period would then permit a sober second thought after the midterms).”

As to a full-scale tariff war, Capital Economics believes the overall impact on the global economy would not be terrifying, if it happened.

“Our best guess is that even if all the protectionist threats made to date were carried out, they would subtract a lot less than half a per cent from global GDP,” chief global economist Andrew Kenningham and global economist Simon MacAdam said in a recent study.

“A free-for-all, in which all governments imposed high trade barriers, could cause a global recession, but we are confident that this will not happen.”

Of course, that depends on your local economy. And Canada’s is tied to the U.S.

Their colleague in Toronto, chief North America economist Paul Ashworth, noted that such a tariff on $75-billion a year in Canadian autos would be “at least as damaging” as an average 2.4 per cent levy on our total exports to the U.S. of $414-billion.

He used that 2.4-per-cent measure because that’s the hit that would come into effect if NAFTA died and the U.S. reverted to the World Trade Organization tariff regime.

Of course, if auto parts are included, the hit would be much worse.

“In that scenario, the retail price of a finished vehicle in both the U.S. and Canada would increase by significantly more than just the 25-per-cent tariff imposed on the finished good, which would devastate the industry on both sides of the border,” Mr. Ashworth said.

“It is hard to believe that congressional Republicans would allow that to happen but, up to now, at least, they have shown little appetite for standing up to Trump’s destructive impulses.”

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A road sign I’d love to see

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