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Briefing highlights

  • Forecasts for the Canadian dollar
  • Stocks, Canadian dollar, oil at a glance
  • BMO raises dividend, profit slides
  • CN cuts outlook after strike
  • Trade tensions mount
  • What analysts are saying today
  • Required Reading

From good to bad

As JPMorgan Chase & Co. is telling its clients, the Canadian dollar is going “from good to bad, but not quite ugly.”

JPMorgan foreign exchange strategists Patrick Locke and Daniel Hui forecast the currency will sink to 73.5 US cents in the first quarter of 2020 and lose another penny to close out next year at about 72.5 US cents.

“The foundation on which CAD outperformed this past year is liable to dissipate into 2020,” Mr. Locke and Mr. Hui said in their recent forecast, referring to the loonie by its symbol.

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“This is due largely to the fact that the foremost drivers of 2019 cyclical outperformance in Canada were temporary phenomena,” they added.

“Canada will be more vulnerable to a local growth slowdown in 2020, to the detriment of CAD, particularly as we expect a [Bank of Canada] cut in January.”

Lower Canadian interest rates, of course, are not loonie-friendly.

David Rosenberg, chief economist at Gluskin Sheff + Associates until he starts his own firm next year, agreed, though he gave the central bank no timeline.

Canada’s economy is “approaching stall speed,” as are many other economies, Mr. Rosenberg told his clients.

“So not quite recessionary just yet, but still consistent with an increase in deflationary pressures,” he added, saying this should “ultimately” force the Bank of Canada to act.

“As such, we still see the most likely path for the loonie as lower over the near term.”

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Here’s how Mr. Locke and Mr. Hui see the progression in their report titled “CAD: From good to bad, but not quite ugly:”

The good

The Canadian dollar did better than good this year, having “enjoyed persistent strength” against G10 and emerging market currencies, ending 2019 “as one of the top performers in global [foreign exchange].”

This is because of “a relatively resilient domestic economy, especially set against a global backdrop of ongoing cyclical stumbling and disappointment,” which meant the Bank of Canada could stand pat while many other central banks cut their key rates.

The bad

Basically, the drivers of the loonie this year are going to pull back in 2020 as “Canada’s resilience was perhaps more artificial than was appreciated,” Mr. Locke and Mr. Hui said.

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“Accordingly, we expect fundamental weakness in the Canadian economy that lacks relative potential upside drivers, compared to dissipating temporary factors and ongoing global cyclical sluggishness that could weigh on CAD through disappointments next year.”

And the not quite ugly

“Despite our expectations that Canada loses its cyclical exceptionalism and CAD unwinds some of its outperformance, the resulting currency weakness will be only modest, rather than large and broad,” Mr. Locke and Mr. Hui said.

“First and foremost, CAD should retain a decent yield buffer, as we are only calling for a reversion to trend growth (albeit the lower end of potential), rather than a sharper, sustained sub-trend rate or even contraction.”

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Markets at a glance

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BMO raises dividend

Bank of Montreal raised its dividend as it boasted of a strong finish to the fiscal based on adjusted earnings.

BMO increased the quarterly dividend to $1.06, up 3 cents from the prior quarter, as The Globe and Mail’s James Bradshaw reports.

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BMO’s fourth-quarter profit slipped 30 per cent to $1.19-billion, or $1.78 a share amid a restructuring hit.

Adjusted, profit rose to $1.6-billion or $2.43 a share.

BMO also reported provisions for bad loans at $253-million, up from $175-million a year earlier.

Return on equity declined to 9.9 per cent from 16.1 per cent. Adjusted, it dropped to 13.5 per cent from 14.5 per cent.

“BMO finished the year with very strong performance,” chief executive officer Darryl White said in announcing the numbers.

“I am confident that we are well-positioned to deliver sustainable and resilient profitability through an evolving economic environment,” he added.

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Citigroup analyst Maria Semikhatova described the results as “neutral,” noting that BMO’s adjusted earnings per share topped the consensus among analysts.

National Bank analyst Gabriel Dechaine called it a “welcome rebound quarter,” noting the “excellent” results in BMO’s Canadian personal and commercial business, where net income climbed 6 per cent to $716-million.

Results in that group “reflect strong revenue growth, partially offset by higher provisions for credit losses and higher expenses,” BMO said.

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CN cuts outlook after strike

Canadian National Railway is cutting its outlook after being hit by an eight-day strike.

As The Globe and Mail’s Eric Atkins reports, the railway pegged the cost of the walkout on earnings per share at about 15 cents.

CN said it is “now targeting to deliver 2019 adjusted diluted EPS growth in the low to mid single-digit range versus last year’s adjusted diluted EPS of $5.50, compared with its Oct. 22, 2019, financial outlook which called for adjusted diluted EPS growth in the high single-digit range.”

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CN added its focus is still on “continuing to realign its resources in light of the weaker demand, including its work force, to address cost takeout efforts that started prior to the strike.”

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Trade tensions mount

New trade wars are shaping up well beyond China.

The U.S. is now threatening to slap hefty duties – up to 100 per cent – on almost US$2.5-billion on French goods, including champagne.

This came after the U.S. Trade Representative declared that a French tax on revenues of certain digital services went against the “principles” of global policies.

France’s finance minister said the EU was prepared to retaliate.

Separately, Mr. Trump said today he has no deadline set for a trade deal with Beijing, and that “in some ways I think I think it’s better to wait until after the election with China.”

But, he added, “they want to make a deal now, and we’ll see whether or not the deal’s going to be right, it’s got to be right.”

Along with that is a World Trade Organization finding against the European Union maintaining it isn’t still giving Airbus subsidies. That, too, could put the U.S. on tariff attack.

“The sudden new belligerence from the U.S. appears to have caught markets slightly off guard, with the U.S. also threatening to increase EU tariffs further after the WTO ruled in favour of the U.S. with respect to EU claims that all illegal subsidies had been removed,” said CMC Markets chief analyst Michael Hewson.

“The goods targeted are likely to include products from the U.K., as well as France, Germany and Spain,” he added.

“The Trump administration also proposed the imposition of 100-per-cent tariffs on French goods like wine, cheese, jewellery, handbags and make-up in retaliation for France’s proposals to target U.S. technology companies in the form of a digital tax.”

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Ticker

South African economy contracts

From Reuters: South Africa’s gross domestic product contracted 0.6 per cent in the third quarter, following a revised 3.2-per-cent expansion in the second quarter, data from Statistics South Africa showed. Africa’s most advanced economy has struggled to emerge from a deep slump in the nearly two years since President Cyril Ramaphosa took the helm with promises to reform. The latest data will pile on the pressure, particularly from ratings agencies that have flagged weak growth as a major risk, and investors weary of increasing state debt as revenues slide.

Japan preparing stimulus

From Reuters: Japan is preparing an economic stimulus package worth US$120-billion to support fragile growth, two government officials with direct knowledge of the matter said, and complicating government efforts to fix public finances. The spending would be earmarked in a supplementary budget for this fiscal year to next March and an annual budget for the coming fiscal year from April. Both budgets will be compiled later this month, the sources told Reuters, declining to be identified because the package has not been finalized. The package would rise to US$230-billion when private-sector and other spending are included.

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What analysts are saying today

“In classic Trump style, the president has argued that he might wait until after the U.S. election for a [U.S.-China] trade deal, something likely to go down very badly in markets. Investors look to have been suckered into believing the trade deal rhetoric again, which raises the prospect that Monday’s selloff may turn into something more substantial.” Chris Beauchamp, chief market analyst, IG

“Those comments by President Trump quickly pierced any hope that the world’s two largest economies were close to sealing a phase one deal before the Dec.15 tariff deadline. Speaking at the sidelines of the NATO summit, the president said he was in no rush to sign and even suggested holding off until after the 2020 presidential election. Meantime, Chinese state media said Beijing would soon publish a list of unreliable U.S. firms that could face sanctions.Priscilla Thiagamoorthy, economic analyst, BMO

“Trade-sensitive currencies led by the [Australian dollar] are stronger this morning and the yen is weaker, despite the re-imposition of import tariffs on U.S. steel imports from Argentina and Brazil, the proposal to impose tariffs on some imports from France, and weak [Institute for Supply Management] data. The [Reserve Bank of Australia] left rates on hold and hinted easy policy is working, which leaves the market expecting no change for the foreseeable future, and 10-year yields smartly higher.” Kit Juckes, global fixed income strategist, Société Générale

Required Reading

Huawei to shift research

Huawei plans to shift research to Canada from the United States and manufacture some mobile network equipment outside China, its founder Ren Zhengfei says, as the Chinese tech giant seeks to combat an increasingly hostile White House. Nathan VanderKlippe reports.

HBC rebuffs Catalyst

Hudson’s Bay Co.’s board of directors has rebuffed Catalyst Capital Group Inc. and its $2-billion proposal to take over the retailer, saying the bid would have no chance of winning over the majority stake controlled by HBC executive chairman Richard Baker. Jeffrey Jones reports.

Insolvencies climb

During October, Canadians filed the highest number of personal insolvencies in a decade, the latest sign that households are struggling to cope with elevated debt loads, Matt Lundy writes.

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