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Briefing highlights

  • Watch the Canadian dollar
  • Markets at a glance
  • EU agrees to Brexit delay
  • LVMH eyes Tiffany
  • Spotify posts surprise profit
  • Tim Hortons parent posts sales jump
  • What to watch for today
  • Awaiting the Bank of Japan
  • Google parent Alphabet in spotlight
  • What analysts are saying today
  • Required Reading

Canadian dollar may face some turmoil

Watch the Canadian dollar this week, and for the next 20 trading days.

Because there could be trouble.

First, as The Globe and Mail’s David Parkinson writes, the Bank of Canada releases its decision Wednesday, and is expected to hold its benchmark overnight rate steady at 1.75 per cent.

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It also releases its monetary policy report, complete with some expected tweaks to the economic outlook, and then holds a news conference.

Later on the same day, the Federal Reserve releases its policy statement, and is expected to trim its rate target by a further one quarter of a percentage point.

Both of these scenarios are priced into currency markets. But key for the Canadian and U.S. dollars will be the commentaries and outlooks.

Keep in mind that if it plays out that way, the U.S. central bank will have cut rates three times while the Bank of Canada held firm, which is loonie-friendly.

Analysts have different scenarios for what Wednesday could mean for the two currencies.

“With markets pricing very low, probability of a rate cut this year and only about 50-per-cent chance through mid-2020, a potentially more cautious BoC pointing to downside risks and the possibility of easing measures at subsequent meetings could push USD/CAD higher,” said Ben Randol, foreign exchange strategist at Bank of America Merrill Lynch.

He was referring to the U.S. dollar versus the loonie by their symbols. And that means pushing the U.S. dollar up and, thus, the loonie down.

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"In our view, risks seem asymmetric to the upside in USD/CAD into [this] week," Mr. Randol said in his lookahead to the Bank of Canada decision.

Bank of Nova Scotia has various scenarios for what could happen, which could push the loonie in either direction.

“Looking ahead to [this] week, the calendar suggests the USD will have to weather some fairly soft-looking data – markets are looking for a slowdown in U.S. GDP growth and sluggish [jobs] gains – as well as the prospect of a Fed rate cut,” said Shaun Osborne, Scotiabank’s chief foreign exchange strategist, and his colleague Juan Manuel Herrera.

"Slower growth, softer job gains and lower rates spell danger for the USD," they added in their report.

Ah, but the signals the Fed sends to markets in its statement could well dictate the fate of the U.S. dollar.

"A reversion to 'patience' in some form would imply a move to the sidelines with the 'mid-cycle adjustment' complete (the USD should pick up some ground)," Mr. Osborne and Mr. Herrera said.

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"Alternatively, continued focus in the policy statement on global growth headwinds and low inflation would imply the door being left ajar for more easing down the road," they added.

"We doubt the Fed will take the ‘hawkish cut’ option and look for USD/CAD to test the 1.30 level.

That 1.30 would mean a Canadian dollar at just shy of 77 U.S. cents.

The Bank of Canada won't want a stronger loonie, said CIBC World Markets chief economist Avery Shenfeld, as that makes Canadian exports more expensive,

"Their commentary will leave the door open for a cut if, as we expect, global headwinds impact growth in upcoming months," Mr. Shenfeld said.

“Talking too hawkishly now risks sparking an unwelcome tightening on trade through a [Canadian dollar] appreciation. We’re sticking to our a call for a 25-basis-point cut in January.”

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Veronica Clark, associate, U.S. economics, at Citigroup, also doesn’t expect anything too hawkish.

"The policy statement should continue to sound cautious, as it did in September, acknowledging downside risks from trade uncertainties and global growth," Ms. Clark said.

"Ultimately, however, we expect the policy guidance that 'the current degree of monetary policy stimulus remains appropriate' to again remain unchanged," she added.

"While there is a non-negligible risk that a more explicit easing bias could be introduced in the statement, data since the September meeting, especially the release of the Q3 Business Outlook Survey, leaves us more confident that this will not occur."

There’s something more going on here, though, partly seasonal in nature, Bank of America’s Mr. Randol pointed out.

First off, while the loonie has done well of late, “global policy uncertainty” will likely continue as trade wars weigh on sentiment and the economy.

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“Accordingly, with Canadian data not yet having reflected the fragile state of the global economy and net capital flows into Canada likely remaining stifled by persistent policy uncertainty, we expect CAD risk premium will expand once again,” Mr. Randol said, citing his year-end target for the loonie at just over 74 U.S. cents.

Here's where the seasonal factor comes into it.

“We would also note the historical tendency for the Canadian dollar to weaken relative to the U.S. dollar at this point in the calendar year,” Mr. Randol said.

"Over the last nine years, USD/CAD has been up eight times and down one over the next 20 trading days, in keeping with the tendency of USD to appreciate at this point in the year."

Longer term, Bipan Rai, CIBC’s North America head of foreign exchange strategy, and his colleague Sarah Ying, projected the loonie will sink to about 71.5 U.S. cents in the second half of next year.

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Markets at a glance

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LVMH eyes Tiffany

Luxury goods maker LVMH has its eye on Tiffany & Co.

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Tiffany confirmed today it received an “unsolicited, non-binding proposal” from LMVH to acquire the high-end jeweler for US$120 a share in cash.

That price would represent a takeover worth US$14.5-billion, Reuters reported.

“While the parties are not in discussions, Tiffany’s board of directors, consistent with its fiduciary responsibilities, is carefully reviewing the proposal, with the assistance of independent financial and legal advisors, to determine the course of action it believes is in the best interests of the company and its shareholders,” Tiffany said in a statement.

“Tiffany shareholders need take no action at this time.”

Read more

Ticker

AT&T bows to pressure

From Reuters: AT&T Inc. said it would add two new board members and consider selling off up to US$10-billion of non-core businesses next year, bowing to pressure from activist investor Elliott Management.

Tim Hortons parent posts sales jump

From Reuters: Restaurant Brands International Inc. reported a 6-per-cent rise in quarterly revenue, boosted by strong demand for chicken sandwiches at Popeyes and vegan burgers at its Burger King chain. Comparable sales rose 4.8 per cent at Burger King and 9.7 per cent at Popeyes in the third quarter ended Sept. 30, beating analysts’ estimates of 3.98 per cent and 4.72 per cent, respectively, according to IBES data from Refinitiv. Total revenue rose to US$1.46-billion from US$1.38-billion.

Spotify posts surprise profit

From Reuters: Spotify Technology SA posted a surprise profit topped Wall Street’s expectations for revenue as the music streaming company added slightly more subscribers than expected for its premium service. The Swedish company, which has outstripped Apple Music in the race to dominate music streaming globally, said its number of premium subscribers had risen by 26 million in the past year to 113 million at the end of September.

Carlsberg boosts outlook

From Reuters: Danish brewer Carlsberg revised up its annual growth outlook, saying it now expects operating profit to rise by around 10 per cent against a previous high single-digit estimate. The brewer cited solid earnings in key markets Western Europe and China, which “more than offset” weakness in Russia. Carlsberg is due to publish a trading statement for its third quarter on Thursday, in which it said further details will be provided.

HSBC drops target

From Reuters: HSBC Holdings PLC dropped its 2020 profit target, reported a sharp fall in earnings and warned of a costly restructuring, as interim chief executive Noel Quinn seeks to tackle its problems head-on in his bid for the full-time role.

What to watch for today

Corporate earnings season rolls on with several notable companies reporting quarterly results, including AT&T Inc., Aimia Inc., Google parent Alphabet Inc., Baidu Inc., PrairieSky Royalty Ltd., and T-Mobile US Inc.

What analysts are saying today

“Later this week, the Bank of Japan will hold its second-last meeting for this year and may, for the first time since July 2018, make some adjustments to monetary policy; heck, it might introduce even more stimulus! Japan’s export-reliant economy suffers from sluggish growth and persistently below-target inflation. And, though it is still early, it does not look like the cashback reward points system, introduced to soften the hit from the sales-tax hike, has made that much of an impact. Also, the government recently downgraded its economic assessment, blaming prolonged weakness in exports. Unlike the [European Central Bank], the BoJ’s policy board has become broadly dovish, with nearly all policy makers parroting each other, saying that they ‘would not hesitate’ to ease further if needed.” Jennifer Lee, senior economist, Bank of Montreal

“Another good day for the tech sector saw U.S. markets continue to break records last week with the S&P500 making a new record high on Friday, however it is notable that the Dow Jones remains well short of the highs seen in the summer. This ought to give some pause for thought to those who think there is significant further upside for U.S. stocks.” Michael Hewson, chief analyst, CMC Markets

“With the market priced about 90 per-cent for a 25-basis-point cut, the Fed is very unlikely to disappoint. More important will be guidance looking forward (December cut still 40 per cent priced). Trade tensions and Brexit are heading in a more positive direction (on the latter the probability of no deal is low, even if there is no clear path forward). The panic over the inverted yield curve has also dissipated … With the economy broadly on firm footing, the argument to ease beyond the October meeting has weakened.” Elsa Lignos, global head of foreign exchange strategy, Royal Bank of Canada

“Alphabet will release its third-quarter earnings after the market close and the expectations are solid. Google’s earnings are expected to have increased to US$12.317 per share, versus US$11.660 printed a quarter earlier. Google is gaining momentum on its cloud business and have recently announced significant improvements on its research engine. The company said on Friday that its new research system relies on artificial intelligence to parse complex sentences, instead of a suite of key words.” Ipek Ozkardeskaya, senior market analyst, London Capital Group

Read more

Required Reading

Alberta nears deals

The Alberta government is closing in on deals to offload a crude-by-rail program to the private sector, replacing a deal inked by the previous, NDP government in February. Emma Graney reports.

Electric cars and fewer fish

Brent Jang looks at how Jim Pattison’s empire is facing up to climate change.

Shares triple

Falling interest rates are fuelling a sharp rebound in shares of Real Matters Inc., helping the Canadian company shake off a harsh slump following its initial public offering, Tim Kiladze writes.

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