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Briefing highlights

  • Forecasts for the loonie
  • Stocks, Canadian dollar, oil at a glance
  • Cineplex to be acquired by Cineworld
  • Canadian home sales, prices rise
  • Equinox to buy Leagold
  • What to watch for this week
  • What analysts are saying today
  • Required Reading

Best and worst

Bank of America Merrill Lynch says we should hope for the best but prepare for the worst when it comes to the fragile Canadian dollar.

Of course, the worst may be best for some, such as manufacturers and the Bank of Canada, which would applaud a weak currency as a support for exports.

As we head into the end of the year, several forecasters are releasing their latest projections for the loonie, Bank of America foreign-exchange strategist Ben Randol among them.

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"Global trade policy remains the key wild card," Mr. Randol said in his forecast.

“In our view, uncertainty may persist near-term but should decline next year, benefiting the loonie against the greenback but by less than for G10 [foreign exchange] peers.”

Here's his base case:

"Our USD/CAD forecast remains for a near-term retest of 1.34 into end-year, followed by a gradual decline to 1.31 in 2020."

Referring to the U.S. dollar against the loonie by their symbols, that 1.34 translates to a Canadian dollar at just over 74.5 US cents, while 1.31 puts the currency at almost 76.5 US cents.

“Near-term, we think that risks to the Canadian dollar will remain elevated or potentially even increase,” Mr. Randol said in his report, titled “CAD: hope for the best, prepare for the worst.”

"However, we expect that risk premium should compress next year as external conditions become increasingly benign, enabling the exchange rate to converge to medium-term fair value," he added.

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“However, as the broader USD tops out and begins to soften on a benign U.S. convergence story playing out, we expect CAD to underperform G10 [foreign exchange] peers in 2020. This is because we see the benefits of global reflation benefiting areas outside of North America more strongly.”

Besides trade issues, of course, the Bank of Canada’s actions and comments will help dictate the currency’s path. Higher interest rates are loonie-friendly, and the central bank has held back from the rush among its peers to cut, thus buoying the currency in the process.

The Canadian dollar dipped earlier when the latest labour market report showed huge jobs losses, raising speculation the central bank could ease, but it later rebounded as the U.S. currency faltered.

"CAD appreciation should be self-limiting for now," Mr. Randol said.

“In the absence of clarity on trade policy developments and associated positive spillovers to commodity prices, our sense is that the BoC will continue to view CAD appreciation as an unwelcome tightening of financial conditions.”

In his recent outlook, technical strategist George Davis of RBC Dominion Securities put the loonie at just shy of 77 US cents in the first quarter of 2020, then eroding through next year to sit just above 75 US cents in the final three months.

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RBC expects the Bank of Canada to cut its benchmark overnight rate, now at 1.75 per cent, by one-quarter of a percentage point in the second quarter of next year.

"This should erode some of the interest rate support that has propped up CAD in 2019 and lead to a mild uptrend in USD/CAD as 2020 progresses."

That mild uptrend, of course, means a mild downtrend for the loonie.

Kit Juckes, in turn, global-fixed-income strategist at Société Générale, put the Canadian dollar at about 75.75 US cents in the first quarter, and then a rise to 77.5 US cents by the final three months.

“The current level of the [differential on yields of 10-year bonds], being historically consistent with a USD/CAD rate somewhere below 1.25, is very close to purchasing-power parity fair value,” Mr. Juckes said, with that 1.25 translating to a loonie at 80 US cents.

"We don’t expect that level to be reached in 2020, but we are bearish of USD/CAD, expecting to see a move back to 1.25-1.30 eventually."

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Bearish here means bullish on the Canadian dollar, with the range of 1.25 to 1.30 pegging the loonie at between about 77 and 80 US cents.

Bank of Montreal chief economist Douglas Porter said BMO expects the Canadian dollar to be "rangebound" in 2020, with "another mild upward skew toward the higher end of the boundary."

However, that is "not a bullish Canadian dollar call per se, but more of a cautious outlook on the U.S. dollar, which we expect to lose some altitude amid a less fraught global trade backdrop and heading into the deep uncertainty of the 2020 presidential election."

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Markets at a glance

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Cineworld set to swallow Cineplex

Cineplex, Canada’s largest cinema chain, has reached an agreement to be acquired by U.K.-based movie theatre owner Cineworld Group PLC, The Globe and Mail’s Susan Krashinsky Robertson reports.

The proposed deal is worth $2.8-billion in cash and assumption of net debt. Cineworld has offered $34 per share for the Toronto-based company's outstanding common shares.

Cineplex has 76-per-cent market share of the movie theatre business in Canada.

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Global scale is needed "to compete effectively in an evolving entertainment landscape,” the Canadian company said.

Movie theatres have had to cope with a fragmented media landscape, with companies such as Netflix, Amazon, Apple and Disney building up streaming services that offer a plethora of content people can access on-demand at home.

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Home sales, prices rise

Average home prices shot up in Canada in November as sales climbed for the ninth consecutive month.

Sales rose 0.6 per cent from October and 11.3 per cent from a year earlier, the Canadian Real Estate Association said today.

That increase from October to November marked the ninth monthly gain in a row, the group said.

“Activity now stands 20 per cent above the six-year low reached in February, 2019, but 6 per cent to 7 per cent below heights recorded in 2016 and 2017,” it added.

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Those heights, of course, came before the federal bank regulator headed off a credit bubble with new mortgage-qualification stress tests at the beginning of 2018. Markets have rebounded since those tests put a damper on sales.

The national average sales price rose 8.4 per cent in November from a year earlier.

While the national average doesn’t mean all that much, given the wide differences among Canadian markets, it now stands at $529,000.

The MLS home price index, in turn, rose 2.6 per cent from a year earlier.

New listings fell 2.7 per cent, driven largely by the Toronto area.

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Ticker

Equinox in deal for Leagold

From Reuters: Canadian miner Equinox Gold Corp. will buy rival Leagold Mining Corp. for $769.3 million, the company said, the latest addition to the increasing number of mergers in the gold mining industry. Equinox said Leagold shareholders will receive an at-market consideration of $2.70 per share as part of the deal, the same as Leagold’s closing price on Friday.

Euro zone business growth weak

From Reuters: Euro zone business growth remained weak in December, with tepid foreign demand exacerbating a contraction in manufacturing and offsetting a slight pick-up in services activity, although some analysts saw signs of stabilization. IHS Markit’s euro zone composite flash purchasing managers index, seen as a good guide to economic health, stayed at 50.6 in December. Anything above 50 indicates growth.

Chinese numbers beat forecasts

From Reuters: Growth in China’s industrial and retail sectors beat expectations in November, as government support propped up demand in the world’s second-largest economy and amid easing trade hostilities with Washington. Industrial production rose 6.2 per cent year-on-year in November, data from the National Bureau of Statistics showed.

Also ...

Key this week

Notable are decisions by central banks in Britain and Japan, both on Thursday.

The Bank of England isn't under pressure to cut rates now given the majority victory of the Conservatives in last week's election, which removed much of the Brexit uncertainty, said BMO senior economist Jennifer Lee.

"Although the bank was not expected to announce any policy changes on Dec. 19, look for more optimistic comments around the Brexit issue," Ms. Lee said.

"Still, the tough job of trade negotiations has yet to begin," she added.

"The [central bank's monetary policy committee] will wait for subsequent survey data to judge the reaction of households and businesses to this new stage of Brexit. Until then, we look for the BoE to stay on hold for the foreseeable future."

Don't expect much from the Bank of Japan, either.

“Now that [Prime Minister Shinzo] Abe has introduced a ¥26-trillion [$313-billion] stimulus package, the fiscal injection takes pressure off the BoJ to act,” Ms. Lee said.

What analysts are saying today

“The pound has been drifting lower since the exit poll highs seen on Thursday evening. With Johnson’s victory, we will finally see Brexit talks move onto trade negotiations. However, for the short-term we have the almost foregone conclusion of passing the withdrawal agreement to overcome this critical hurdle. The big question now is exactly the scope of U.K.-EU negotiations, with fears that Johnson’s pledge to leave the transitional period by the end of 2020 could lead to a half-baked deal and hard Brexit.” Joshua Mahony, senior market analyst, IG

“With two major tail risks in the rear view mirror, with a U.S., China phase one trade deal apparently completed, and U.K. politics in a more stable place than it has been in three years, investors are taking their cues from much better-than-expected Chinese retail sales and industrial production data for November, and embarking on a bit of pre-Christmas shopping. The success of China’s Singles Day appears to have helped push retail sales up 8 per cent to their best levels since June, while industrial production has also rebounded.” Michael Hewson, chief analyst, CMC Markets

“The Apollo 11 mission also started with a phase one launch, but the significant part was the moon landing. So this weekend’s ‘limited’ [U.S.-China trade] deal, which won’t be signed until next year, is important for symbolic reasons, and as a sign of progress, rather than because it delivers tangible benefits. No one’s going to be changing a GDP forecast on the back of this, but sentiment, notably in trade-sensitive economies and currencies, has improved.” Kit Juckes, global fixed income strategist, Société Générale

Required Reading

Former SNC executive convicted

A former executive of SNC-Lavalin Group Inc. has been convicted of corruption charges relating to the company’s dealings in Libya, one of several cases that have severely damaged the reputation of a Canadian corporate pillar. A jury in Montreal has found former SNC executive vice-president Sami Bebawi guilty of all five charges he faced, including bribing a foreign public official, fraud and laundering the proceeds of crime. A hearing on sentencing is scheduled to take place Dec.19. Nicolas Van Praet reports.

Pattison president touts ‘fair price’

Jim Pattison’s $983.8-million bid to take full control of Canfor Corp. is coming down to the wire, as his right-hand man cautions minority shareholders in the forestry firm to beware of tough times ahead. Glen Clark listed several challenges facing Canfor, such as U.S. duties on Canadian softwood lumber, declining exports to China and the risk of a recession that would slow the pace of home building in the United States, Brent Jang writes.

Madrid climate talks end in near failure

Expectations for a climate breakthrough in Madrid were never high, but even the lowest ones were not met, Eric Reguly reports. The Madrid conference, known as COP25, ended on Sunday afternoon, two days late, after marathon negotiating sessions among almost 200 countries made halting progress in a few areas and virtually no advancement in one crucial area – designing the rule book to govern the global trading of carbon credits.

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