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Briefing highlights

  • What to make of Trump’s demand
  • Stocks, loonie, oil at a glance
  • New York headed for weaker open
  • Canadian dollar above 76 cents
  • CIBC acquires U.S. boutique
  • Canadian housing starts surge
  • Building permits slip
  • Virgin Galactic said to plan IPO
  • Required Reading

Defending their turf

Are other countries playing a “big currency manipulation game,” as President Donald Trump sees it? Or are central banks just defending their home turf?

“We have to remember that before this trade war broke out, most central banks had shifted to a tighter policy track, and were on their way to normalizing policy” said Bank of Montreal senior economist Jennifer Lee.

“The trade war has pushed activity backwards, so policy is being forced to loosen,” she added.

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“It is ‘unfair’ to accuse central banks of manipulating currencies in this environment, when they are simply defending growth.”

Ms. Lee’s comments followed another broadside from Mr. Trump, who complained recently that Europe and China are manipulating their currencies. The United States should take similar action, he said, or “continue being the dummies who sit back and politely watch as other countries continue to play their games.”

It’s interesting because, among other things, markets speculate the Federal Reserve will cut interest rates as early as this month, and then again at some point, not to soften the U.S. dollar but to buoy the economy.

Mr. Trump has been pressing the Fed to bring rates down.

“Easing will weaken the greenback, so is that manipulating it?” Ms. Lee asks.

Take that a step further: Markets and some economists believe the Bank of Canada could follow the Fed, less aggressively but in a move that would still hold the Canadian dollar back.

And, for that matter, it will be interesting to see what the Bank of Canada says when it releases its rate decision and monetary policy report Wednesday.

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“The BoC will attempt to thread the needle of sounding sufficiently dovish to keep the C$ from rocketing, while recognizing that Canada remains in decent shape … at least for now,” Benjamin Reitzes, BMO’s Canadian rates and macro strategist, and Ms. Lee’s colleague, wrote in his lookahead to the decision.

Consider, too, how this all began, as Mr. Trump came to power with a protectionist agenda and began taking on countries one by one. He’s now embroiled in a trade war with China.

“The accusations (warranted and otherwise) of unfair trade practices have sparked the current trade war and protectionist environment,” Ms. Lee said.

“Economic growth has slowed as a result, prompting central banks to shift to a dovish stance, and ease outright,” she added.

“That, in turn has prompted accusations of unfair currency manipulation using monetary policy.”

There are other ways for a sovereign government to bring down a currency, notably by intervening in markets, something that – at least in the United States – hasn’t been done in years. And while it seems unlikely the U.S. Treasury would go that route, analysts are at least pondering the possibility.

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“It’s definitely within the realm of possibility that we’re getting closer to Trump intervening in the [foreign exchange] market to weaken the USD,” said Bipan Rai, North America head of foreign exchange strategy at CIBC World Markets.

“We see those odds increasing if the Fed doesn’t ease rates in the next few meetings,” he added.

“Direct and unilateral intervention is unlikely to be effective. Instead, the most likely method for the Trump administration to achieve lasting USD weakness is via multilateral intervention, but there are doubts as to which countries would co-operate.”

While countries have joined forces to intervene in the currency markets before, it’s not likely any would sign on to such an effort now.

“Any intervention now would presumably be a unilateral U.S. effort, which may even prompt other countries to retaliate by selling their own currencies to drive the U.S. dollar higher,” said Paul Ashworth, chief U.S. economist at Capital Economics.

For this and other issues, “there are good reasons to believe that any intervention now would fail,” he added.

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Markets at a glance

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CIBC acquires U.S. boutique

Canadian Imperial Bank of Commerce is adding to its expanded U.S. footprint by acquiring Cleary Gull, a boutique investment banking company based in Milwaukee, The Globe and Mail’s James Bradshaw reports.

The deal bolsters CIBC’s capacity to serve the middle-market, privately owned companies that are the bread and butter of its U.S. commercial banking business, particularly in the U.S. Midwest.

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Housing starts surge

Housing construction starts in Canada surged in June, largely on a whopping increase in condos.

Housing starts rose 26 per cent from May, hitting an annual pace of 245,657, Canada Mortgage and Housing Corp. said. That was far more than observers had projected.

Starts of multiple urban units rose 31 per cent, while construction of single detached homes climbed 8 per cent.

“The recent pickup has taken the average monthly pace above 220,000 for the current quarter, after dipping below 200,000 in Q1,” said CIBC senior economist Royce Mendes.

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“Today's print adds further evidence that residential investment will show up as a positive contributor to GDP growth for the first time since 2017,” he added.

“Looking ahead, though, many of the prior headwinds to the housing sector remain in place, and will likely see the strength seen in Q2 taper off as the year progresses.”

Separately, Statistics Canada reported that the value of building permits issued across the country fell 13 per cent in May from April’s record, to $8.2-billion.

“The national decrease was largely the result of the value of permits for multifamily dwellings in British Columbia returning to recent levels, following a significant rise the previous month in response to Metro Vancouver’s impending increases in development costs introduced in May,” the federal agency said.

Ticker

Pepsi tops estimates

From Reuters: PepsiCo Inc. beat analysts’ estimates for quarterly revenue and profit, as the company benefited from demand for its sodas and Lays chips, as well as its sparkling waters.

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Virgin Galactic said to plan IPO

From Reuters: Richard Branson’s space-tourism venture, Virgin Galactic, plans to go public as part of a deal with a special purpose acquisition company created by Social Capital LP’s chief executive officer, a person familiar with the matter said.

Structural steel imports from Canada not unfairly subsidized: U.S.

From Reuters: The U.S. government said domestic producers were being harmed by imports of fabricated structural steel from China and Mexico, and that it would instruct the customs agency to collect cash deposits from importers of such steel. The U.S. Commerce Department said it found imports from Canada were not being unfairly subsidized.

Required Reading

Foreign buying declines in Vancouver housing market

Foreign buying has dropped dramatically in the Vancouver region’s real estate market three years after British Columbia introduced a tax that targets international purchases, a policy move that has helped drive down prices. Brent Jang reports.

Bullish on markets

Meet Fidelity portfolio manager Mark Schmehl, who’s staying bullish on markets. Brenda Bouw spoke to him about what he’s buying and selling.

Dropped emergency calls

A disruption of wireless voice service at Rogers Communications Inc. and Shaw Communications Inc.'s Freedom Mobile that began on Sunday caused a range of dropped customer calls, including those to 911 emergency operators. Stefanie Marotta reports.

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