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Briefing highlights

  • What to expect from Bank of Canada
  • A Kawhi Leonard scene I’d love to see
  • CannTrust plunges on non-compliance finding
  • Stocks, loonie, oil at a glance
  • Deutsche rises on restructuring
  • Lira sinks on central bank dismissal
  • Required Reading

High-wire act

The Bank of Canada has something of a high-wire balancing act to perform this week.

The central bank isn’t expected to move its benchmark overnight rate from the current level of 1.75 per cent. But what it says, and how it says it, will be key for markets.

"The Bank of Canada is expected to hold policy rates steady at the July 10 policy meeting, but that’s one of the few certainties," said Benjamin Reitzes, Bank of Montreal's Canadian rates and macro strategist.

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“The global central banking community has turned significantly more dovish over the past couple of months, and the BoC has thus far been able to refrain from openly discussing potential easing,” he added.

“While Canada is clearly facing different circumstances than the U.S., there’s a limit to how far the [Federal Reserve] can cut before the BoC is forced to follow suit. For now, this is not an issue as the Canadian data have had a solid run.”

And therein lies part of the balancing act for governor Stephen Poloz, senior deputy governor Carolyn Wilkins and their colleagues when they release their decision and monetary policy report Wednesday morning.

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

PATRICK DOYLE/The Canadian Press

The central bank will have to revise its economic projections, boosting its forecast for a second quarter that's already over, while possibly taking a less optimistic view of the second half of the year and into 2020.

It last pegged second-quarter growth at an annual pace of just 1.3 per cent. But economic readings, particularly for trade, have come in better than expected, leading BMO, for example, to expect the central bank to revise that to 2.5 per cent or more.

"However, the bank was previously very upbeat on [the second half of the year], and that will likely be dampened notably given the deteriorating global backdrop," Mr. Reitzes said.

“The question then becomes, what is more important for policy makers: A much stronger-than-expected Q2 or a potentially sharply weaker H2 [second half]? Indeed, the latter likely means we’ll see a downgrade to the 2020 growth outlook, as well, from 2.1 per cent. The BoC’s decision here might be the key factor on what tone is taken at the meeting.”

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And thus, how markets react.

This comes as markets expect the Fed to cut interest rates, possibly as early as this month. Markets, and some economists, expect the Bank of Canada to cut, too, but not until later next year.

More of the high-wire act here, then.

"[Poloz] must also be aware of recent signals of slowing global industrial activity, and needs to be careful about sounding too hawkish as others are signaling a policy ease, lest he send the Canadian dollar on an export-denting tear," said CIBC World Markets chief economist Avery Shenfeld.

Higher interest rates, and speculation of higher rates, of course, are loonie-friendly.

BMO's Mr. Reitzes agreed.

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"There’s a delicate balance governor Poloz needs to achieve at this meeting," Mr. Reitzes said.

“On the one hand, the strength in the data suggests there’s no reason to sound any more dovish, or muse about potential cuts,” he added.

"However, with the Fed poised to act at month end, there’s a risk that a lack of dovishness could push the Canadian dollar sharply stronger, tightening financial conditions. That, in turn, would likely force the bank to turn more dovish and potentially cut."

Keep in mind, too, that the Fed releases the minutes of its last meeting the same day, in the afternoon.

"We think a potential juxtaposition between dovish Fed and relatively hawkish BoC messaging could prove a source of idiosyncratic downside pressure on the exchange rate consistent with our bearish USD/CAD view," Carlos Capistran, Canada and Mexico economist at Bank of America Merrill Lynch, and his colleagues, foreign exchange strategist Ben Randol and rates strategist Olivia Lima, said in a lookahead to Wednesday's decision.

Referring to the U.S. versus Canadian dollars by their symbols, bearish in this case means bullish for the loonie.

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Fed chair Jerome Powell is also in the spotlight Wednesday morning, testifying to a House committee. That will be followed a day later with Senate testimony.

Fed chair Jerome Powell

Kevin Lamarque/Reuters

"If Powell is disinclined to lower rates in July, this would arguably be his best (and perhaps last) opportunity to push back against market pricing that overwhelmingly favours a 25-basis-point cut (and even some odds of a 50-basis-point move)," Royal Bank of Canada senior economists Nathan Janzen and Josh Nye said in a lookahead.

"So unless he gives a clear signal that policy makers want to see more data before pre-emptively lowering rates, markets will continue to expect a July cut - making it difficult for the Fed to not follow through."

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A scene I’d love to see

Hey, nobody can afford a home in Toronto

Ben Margot/The Associated Press

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CannTrust in non-compliance

CannTrust Holdings Inc. shares sank after it disclosed its greenhouse operation in Pelham, Ont., is “non-compliant” with regulations and a hold placed on inventory.

“CannTrust has accepted Health Canada’s non-compliance finding and has taken actions to ensure current and future compliance,” it said in a statement.

Health Canada has put a hold on about 5,200 kg of dried cannabis, and CannTrust itself a “voluntary hold” of 7,500 kg of dried cannabis equivalent at its Vaughan operation.

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“The non-compliant rating is based on observations by the regulator regarding the growing of cannabis in five unlicensed rooms and inaccurate information provided to the regulator by CannTrust employees,” the company said.

“Growing in unlicensed rooms took place from October, 2018 to March, 2019, during which time CannTrust had pending applications for these rooms with Health Canada.”

CannTrust added that the Pelham and Vaughan units “remain fully licensed and the company continues to grow, cultivate, harvest and sell cannabis.”

Health Canada is doing quality checks on Pelham samples, and CannTrust expects results of those in 10 to 12 business days.

“Due to the product on hold, some CannTrust customers and patients will experience temporary product shortages. The company is exploring options to mitigate these shortages.”

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Markets at a glance

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Deutsche shakeup boosts stock

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From Reuters: Deutsche Bank shares rose as it launched one of the biggest overhauls of its investment bank since the financial crisis by cutting 18,000 jobs around the world, starting the day with cuts in Asia.

Lira sinks on central bank dismissal

From Reuters: Turkey’s lira weakened Monday after President Tayyip Erdogan dismissed the central bank governor, reigniting concerns about political interference in monetary policy and expectations of rate cuts to revive the recession-hit economy.

British Airways faces fine

From Reuters: British Airways-owner IAG faces record US$230-million fine for the theft of data from 500,000 customers from its website last year under tough new data-protection rules policed by the U.K.’s Information Commissioner’s Office.

Required Reading

OSFI reprimanded Scotiabank

Canada’s banking regulator reprimanded Bank of Nova Scotia for inadequate record-keeping in its Puerto Rican operations, years before Scotiabank decided to sell its 109-year-old subsidiary at a loss. Rita Trichur reports.

Rogers aims to leave mark

Meet Carolyn Rogers, the bank regulator who aims to heave her mark on the global financial system as the first Canadian head of the Basel Committee. James Bradshaw reports.

The good and bad

The U.S.-China trade truce may be good for markets, Barrie McKenna argues, but it’s bad for Canada.

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