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Briefing highlights

  • Canadian dollar undervalued
  • U.S.-China trade talks to resume
  • Stocks, loonie, oil at a glance
  • Draghi ignored bond-buying advice: report
  • U.S. consumer prices tame
  • What analysts are saying today
  • Required Reading

Loonie undervalued

Bank of Nova Scotia calls it “the Trump uncertainty shock.”

That’s what explains why the Canadian dollar is undervalued compared with the U.S. currency, amid an apparent divergence since Mr. Trump’s election from what drove the loonie in the past.

Among the key points in their report, Scotiabank chief foreign exchange strategist Shaun Osborne and his colleague Juan Manuel Herrera noted that, in the longer term, the loonie’s value was affected by “four core variables,” including oil and non-energy prices, Canadian manufacturing labour productivity compared with that in the United States, and the spread between yields of two-year Canada and U.S. bonds.

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“However, the Canadian dollar has seemingly diverged from its long-run fundamentals since the election of President Trump in November, 2016, owing to the degree of uncertainty that Trump’s trade agenda has generated on the future of the global economy and the free flow of goods,” said Mr. Osborne and Mr. Herrera.

“Canada and Mexico were among the first victims of the White House’s protectionism, as the two countries were pushed into agreeing to a renewed trade agreement with the U.S., lest NAFTA were ripped up or further tariffs were imposed on their exports to the U.S.,” they added in their report.

“Since late 2016, the loonie has remained fundamentally undervalued as bouts of trade uncertainty, as captured by market volatility indices, stiffen the headwinds for the currency.”

The fundamentals, Mr. Osborne and Mr. Herrera said, would put the value of the Canadian dollar at about 80 US cents or a bit more. And, of course, it’s about a nickel shy of that.

USDCAD

With Trump effect

Without Trump effect

Actual

$1.50

1.40

$1.324

1.30

$1.317

$1.246

1.20

1.10

1.00

0.90

‘14

‘15

‘16

‘17

‘18

‘19

Note: Data to Sep. 2019.

SOURCE: BANK OF NOVA SCOTIA

USDCAD

With Trump effect

Without Trump effect

Actual

$1.50

1.40

$1.324

1.30

$1.317

$1.246

1.20

1.10

1.00

0.90

2014

2015

2016

2017

2018

2019

Note: Data to Sep. 2019.

SOURCE: BANK OF NOVA SCOTIA

USD/CAD

With Trump effect

Without Trump effect

Actual

$1.50

1.40

$1.324

1.30

$1.317

$1.246

1.20

1.10

1.00

0.90

2014

2015

2016

2017

2018

2019

Note: Data to Sep. 2019.

SOURCE: BANK OF NOVA SCOTIA

Don’t expect the loonie to rise, either.

“Ultimately, the divergence of the USDCAD from its fundamental drivers appears to be explained by the rise in market and trade uncertainty brought on by President Trump’s erratic political agenda, with the president’s actions leading to an estimated 5-per-cent overvaluation of the U.S. dollar over the loonie,” said Mr. Osborne and Mr. Herrera, referring to the U.S. dollar against the loonie by their symbols.

“With an impeachment investigation under way in the U.S. House, the still unresolved trade dispute with China, the threat of tariffs on European autos, and the cumulative impact of these on global uncertainty set to prevail in the near- to medium-term, the Canadian dollar looks poised to remain undervalued in the foreseeable future.”

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Simona Gambarini, markets economist at Capital Economics, noted that the loonie has fared better of late than the Australian and New Zealand dollars, known among traders as the Aussie and kiwi, respectively.

But this “relative resilience” of the loonie won’t last through the end of 2019, she added in a report, though all three currencies will stabilize next year.

“The Aussie and the kiwi have fallen sharply against the greenback, even though the prices of Australia and New Zealand’s key commodity exports, notably iron ore and dairy, respectively, have increased and their terms of trade have improved,” Ms. Gambarini said.

“In contrast, the loonie has appreciated despite the fact that the price of oil, Canada’s main commodity export, is broadly unchanged on the year, and so are the country’s terms of trade.”

At play here, Ms. Gambarini said, are interest rate differentials, which have pushed down the Australian and New Zealand currencies, but propped up the loonie as the Bank of Canada makes no move to cut its benchmark.

Also a factor is the Washington-Beijing trade spat, given the reliance of Australia and New Zealand on trade with China. Canada, of course, is reliant on trade with the United States, whose economy has been solid.

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“Nonetheless, given our view that the U.S. economy will slow in the rest of 2019, triggering a sell-off in global stock markets and boosting safe-haven demand for the greenback, we doubt that the loonie will continue to buck the trend.”

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U.S.-China trade talks resume

Trade negotiators for the United States and China are sitting down in Washington today in their latest attempt to settle the heated tariff war.

Markets have moved up and down on how this has played out, so today’s round could be key to their fortunes.

“Markets continue to be buffeted by trade war stories, as the U.S. and China prepare for more talks today,” said IG chief market analyst Chris Beauchamp.

“It was going to be a week of headlines, and it is far from over yet,” he added.

“Expectations of any progress remain low, which at least provides the potential for a pleasant surprise, and reports that the U.S. is considering a currency pact as part of a stage one deal have helped to restore some optimism.”

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Markets at a glance

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Ticker

Draghi ignored advice: Financial Times

From Reuters: European Central Bank President Mario Draghi ignored advice from the bank’s monetary policy committee not to resume bond purchases, the Financial Times reported, shedding more light on how divisive the move was. The ECB pledged indefinite bond purchases in September, even as more than a third of the rate-setting governing council opposed the move, an unusually high level of dissent for a body that normally strives for consensus. The monetary policy committee - made up of technocrats mostly from the euro zone’s 19 central banks - sent a letter to Mr. Draghi and other council members several days before the meeting, advising against fresh bond buys, the FT cited three members of the council as saying.

U.S. consumer prices tame

From Reuters: U.S. consumer prices were unchanged in September and underlying inflation retreated, supporting expectations the Federal Reserve will cut interest rates in October for the third time this year amid risks to the economy from trade tensions.

U.S. to issue licenses

From Reuters: The United States will soon issue licenses allowing some U.S. companies to supply non-sensitive goods to China’s Huawei, the New York Times reported, as high-level officials from the two countries meet this week to resume trade talks. Huawei Technologies Co Ltd, the world’s biggest telecoms gear maker, has been put on a U.S. trade blacklist since May, when trade talks between Washington and Beijing broke down. The United States says the company can spy on customers, which Huawei denies. The blacklisting blocked Huawei from buying parts and components from U.S. companies without U.S. government approval, limiting its access to essential technologies such as Google Mobile Services.

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U.K. expected to avoid recession

From The Associated Press: The British economy looks like it will avoid falling into recession in the run-up to the scheduled Brexit date after official figures showed growth held up in the three months through August. Though the Office for National Statistics found that the British economy contracted by a monthly 0.1 per cent during August, that was offset by an equivalent upward revision to July’s growth rate to 0.4 per cent. That means that the economy would have to contract sharply in September for the third quarter as a whole to be negative.

Canopy names new chair

From Reuters: Cannabis producer Canopy Growth Corp. said it appointed Constellation Brands Inc. chief financial officer David Klein as the new chair of its board, effective immediately. Canopy said John Bell, who held the position of interim chair over the past few months, will remain as a director of the board.

LVMH boosts luxury shares

From Reuters: Shares in LVMH rose, lifting other European luxury goods stocks as the Louis Vuitton owner’s stronger-than-expected sales update eased fears of any major fallout from protests in Hong Kong on high-end brands. Luxury labels rely on Hong Kong as a magnet for travellers and shoppers across Asia. Several months of pro-democracy protests have forced some retailers to close their doors temporarily and lose out on business there.

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GM sales slip in China

From Reuters: General Motors Co.’s July-to-September vehicle sales in China fell 17.5 per cent, as the U.S. automaker was hurt by a slowing economy amid the Sino-U.S. trade war and by heightened competition in its key mid-priced SUV segment. GM delivered 689,531 vehicles in China in the third quarter this year, according to a company statement. The drop for the quarter ended Sept. 30 marks the fifth straight quarterly sales decline for GM in China, the world’s biggest auto market.

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What analysts are saying today

“The latest German trade numbers showed that a key part of its economy continued to struggle as exports fell sharply in August, by 1.8 per cent in further signs that the global economy is slowing. To compound concerns about Europe’s economy, the latest French industrial production data for August also sank sharply, declining 0.9 per cent, while manufacturing slid 0.8 per cent, some really ugly numbers. This is an unwelcome reminder to Europe’s policy makers, if any were needed, that while [European Central Bank] monetary policy is very loose, in the absence of fiscal reform the cracks in Europe’s economy are getting wider.” Michael Hewson, chief analyst, CMC Markets

“Markets have a risk-on tone as China-U.S. trade talks get back under way today and various reports overnight continue yesterday’s theme of a partial deal, including a revival of the clause on currency stability and the suspension of the next tranche of tariffs. The talks are scheduled to end tomorrow, but may go on into the weekend if progress is made.” Adam Cole, chief currency strategist, Royal Bank of Canada

“Changing the trading relationship with China is a crucial part of Trump’s plan. Just getting Chinese companies to boost their imports of things like soybean plus pork isn’t going to cut it for Mr Trump. Concerns about national security, in addition to intellectual property rights, are the major issues for the U.S., and these are likely to be the longer-term sticking points.” David Madden, market analyst, CMC Markets

“Earnings season, which is just a week away from now, should also help shape the Fed expectations. Third quarter earnings are expected to be low. So, there are two possibilities. Either the company earnings are low but still better than expected - as it has been the case in the last quarters. Or this time, the company earnings are hit as much as expected by the ongoing trade tensions. And that’s bad.” Ipek Ozkardeskaya, senior market analyst, London Capital Group

Required Reading

A headache for TD

A pricing war has rattled the U.S. discount stock brokerage market, putting Toronto-Dominion Bank in a strategic bind as Canada’s second-largest lender mulls ways to mitigate the damage, James Bradshaw writes.

China’s message to the NBA

China’s hostile reaction to an NBA executive’s tweet in support of anti-government protesters in Hong Kong has opened a window into the potency of nationalistic sentiment in the country, where consumers and sports fans have demonstrated a willingness to turn on brands for love of country. Nathan VanderKlippe reports.

No energy plan

Why is there no coherent energy plan being pitched in the election? Economics columnist David Parkinson examines the issue.

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