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business briefing

Briefing highlights

  • Canadian dollar still troubled
  • Markets at a glance
  • Part-time work swells in Canada
  • Jobless rate dips to 5.9 per cent
  • Canada sees trade surplus, first since 2016
  • U.S. jobs growth cools
  • Precision Drilling to buy Trinidad Drilling
  • Tesla’s Musk mocks SEC
  • Danske Bank shares plunge

How much respect?

This much!

To borrow from the late comedian Rodney Dangerfield, the Canadian dollar don’t get no respect.

Even with a new trade deal.

Even with an oil price rally.

The loonie had been expected to bounce after Canada reached a deal with the U.S. to join with Mexico in a pact that would replace the North American free-trade agreement.

Indeed, the currency rallied after the proposed U.S.-Mexico-Canada Agreement was unveiled, though hardly to the level that had been projected. And it couldn’t even hold above 78 U.S. cents.

Holding back the loonie, economists say, are the differences in Canadian and American interest rates, our lagging competitiveness and the gap between the price of our oil and that of the U.S.

The recent price of West Texas intermediate oil, the U.S. benchmark, would normally mean a Canadian dollar above 82 US cents, said David Rosenberg, chief economist at Gluskin Sheff + Associates.

“But the loonie is nowhere near 82 cents, even after this little rally, which told us that the NAFTA-related uncertainty on its own only mattered to the tune of barely more than a penny! ‚” Mr. Rosenberg said in a report to clients.

“Imagine that – if oil were all that mattered, if the loonie were truly just a petro-currency, it would be more than 4 cents higher than it is today.”

Here are some of the issues:

MONETARY POLICY: ‘OUTGUNNED BY THE FED’

The Bank of Canada has been raising interest rates, and is widely expected to do so again later this month.

But it still trails its U.S. counterpart, the Federal Reserve, a gap that isn’t loonie-friendly.

“We don’t share the optimism that the Bank of Canada sometimes, but not always, expresses on the ability of trade and related business investment to supplant housing as a source of growth as interest rates climb,” said economists Avery Shenfeld and Katherine Judge of CIBC World Markets.

“The [central] bank’s own research department has cast a more negative light on export competitiveness,” they added in a recent report, noting that real U.S. exports have climbed 75 per cent from where they were in 2000, but shipments from Canada have done little in the same period.

To fight that, it will be necessary to tamp down the loonie.

“That should still see the Bank of Canada trail the Fed, hiking only 50 basis points in total in the next few quarters,” Mr. Shenfeld and Ms. Judge said.

“Look for the Canadian dollar to return to the low 1.30 range in 2019 as the BoC is outgunned by the Fed.”

That 1.30 translates to a loonie valued at about 77 US cents.

Simona Gambarini of Capital Economics also expects the difference in rates to “move against the loonie” next year.

She projected the Fed’s benchmark rate will top out in mid-2019 at a range of 2.75 to 3 per cent, while the Bank of Canada peaks at 2 per cent early in the year.

Ms. Gambarini also suggested the loonie could reach 80 US cents within the next few weeks, but that it will end this year at about 78 US cents and next year at just above 75 US cents.

Ben Randol, G10 foreign exchange strategist at Bank of America Merrill Lynch, sees a different path for the Bank of Canada, but a limp loonie, nonetheless.

“From a monetary policy perspective, a reduction in trade policy uncertainty should allow the Bank of Canada (BoC) to continue the rate-normalization process with more confidence,” Mr. Randol said.

“However, hikes at the Oct. 24 and Jan. 9 meetings are fully priced, and the BoC is currently priced to hike by about 80 basis points over the next eight meetings, in virtual lockstep with the Fed,” he added.

“It seems questionable whether the BoC would hike at a faster pace than the Fed, particularly if [the Canadian dollar] were to appreciate. Thus, we see fundamental limits to how far [the U.S. versus Canadian dollar] can move.”

Toronto-Dominion Bank deputy chief economist Derek Burleton said the loonie could gain, depending on where things go from here.

“It could test its fair value of roughly 80-82 US cents if the trade discount gets further reversed and if more rate hike expectations are priced in,” Mr. Burleton said.

OIL: OUTGUNNED BY WTI

Stronger crude prices tend to boost the Canadian dollar because of our dependence on the oil patch.

But there are a few things going on this time around that make a difference, including the marked gap between Western Canada Select oil and WTI, which has been at about $US40 a barrel.

“Currently, there are questions around whether the current drift higher in WTI prices will feed into a stronger CAD moving forward,” said Bipan Rai, CIBC’s North America head of foreign exchange strategy, referring to the loonie by its symbol.

“Put simply, a larger discount implies that the CAD doesn’t participate fully in the WTI rally as the correlation and sensitivity weakens,” he added.

COMPETITIVENESS: OUTGUNNED BY THE U.S.

A long-running issue, this.

“There could be modest further near-term currency strength as some of the negative sentiment around Canada unwinds, but the longer-term picture is still challenging for the loonie,” Bank of Montreal’s economics team said in a research report.

“Canada continues to struggle from a competitiveness perspective, and the USMCA doesn’t change that,” the group added, putting the loonie at 78.5 US cents at the end of 2018, and 80 US cents by the end of next year.

“Broader policy changes are needed to address this issue, meaning any further strength will be relatively limited.”

Gluskin’s Mr. Rosenberg cited competitiveness issues in the areas of both trade and taxes, noting Canada’s current account deficit is “massive” at almost 3 per cent of gross domestic product.

“The last time Canada did not have a current account deficit was back in the third quarter of 2008 – and the Canadian dollar back then was just a shade below par,” he said.

“So we know what has to happen for the loonie to revive on any meaningful and lasting basis – we need to become more competitive.”

Then there are taxes after the overhaul by the Trump administration.

“Canada also is very uncompetitive when it comes to top marginal tax rates for both the corporate and personal taxes,” Mr. Rosenberg said.

“Sadly, the federal government, feeling obliged to fill its 2015 campaign pledge on tax fairness, has flashed signals that little will be done to redress the tax rate gap in its next budget. This is a critical factor clipping the loonie’s wings now and in the near future.”

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Unemployment dips

Statistics Canada turned out two key reports this morning, one of which may well raise eyebrows. Again.

That would be the September measure of the labour market, which showed 63,000 jobs created, all part-time positions, and a dip in unemployment to 5.9 per cent.

The job-creation figure was well above what economists projected for this traditionally volatile report.

Employment rose in Ontario and British Columbia, and was largely unchanged in other regions, the agency said.

Those jobs gains were driven by construction, and finance, insurance and real estate.

Note that the report showed a massive gain of 80,000 part-time jobs and a loss of 17,000 full-time positions.

And amid all the trade-related angst, note that Canada chalked up a surplus in August for the first time since late 2016.

Canada swung to a gain of $526-million from a deficit of $189-million in July as both imports and exports slipped.

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