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Briefing highlights

  • Canada needs a feeble dollar
  • Stocks, Canadian dollar, oil at a glance
  • Canadian retail sales slip
  • TD now on list of systemic banks
  • Xi wants ‘phase one’ trade deal
  • What to watch for today
  • What analysts are saying today
  • Required Reading

Loonie ‘just isn’t weak enough’

CIBC World Markets believes Canada needs a weaker dollar.

And we’re headed that way, according to CIBC economic analyst Taylor Rochwerg’s latest projections.

The Canadian dollar, Ms. Rochwerg said this week, “just isn’t weak enough” to help do what needs to be done.

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“From a longer-term perspective, a weaker loonie is needed to support Canada’s current account and trade balances,” Ms. Rochwerg said.

“A depreciation in the C$ versus the US$ will help Canadian export competitiveness versus other major players, especially within the U.S., where it’s lost ground in recent years,” she added.

“Moreover, boosting exports will be increasingly important as household spending remains sluggish. This should see the currency pair hover around 1.38 in Q4 2020, and approach 1.40 into 2021.”

That 1.38 would translate to a Canadian dollar at about 72.5 US cents, while 1.40 would put it at just shy of 71.5 US cents.

For now, Ms. Rochwerg said, she expects the U.S. versus the Canadian dollar to “remain rangebound.”

But as we move into the first quarter of next year, she believes there will be “sufficient evidence of waning domestic fundamentals on the back of the global deceleration” to justify a quarter-of-a-percentage-point cut to the Bank of Canada’s key overnight rate, which now stands at 1.75 per cent.

“As that’s not currently being priced in by markets, the move should see the C$ weaken modestly, with USDCAD hovering around 1.33 and 1.34 in Q1 and Q2 of next year, respectively,” Ms. Rochwerg said, referring to the U.S. versus the Canadian dollar by their symbols.

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Those numbers would mean a loonie valued at above 75 US cents and then just topping 74.5 US cents, respectively.

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Markets at a glance

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Retail sales slip

Canada’s retailers suffered their first down month in three months in September, but registering a drop in sales of just 0.1 per cent.

And if you strip out the impact of gas stations and auto and parts companies, sales climbed 0.7 per cent, Statistics Canada said.

“The largest contribution to the monthly decline came from the motor vehicle and parts dealers subsector (-1 per cent), which declined for the first time in three months due to lower sales at new car dealers (-1.9 per cent),” the agency said.

“Sales were up at used car dealers (+3.6 per cent), following a 3-per-cent decline in August,” it added.

“Sales at gasoline stations (-2.3 per cent) were down for the second month in a row, reflecting in part lower prices at the pump. In volume terms, sales at gasoline stations were down 1.1 per cent.”

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Ticker

TD added to list of systemic banks

From Reuters: Toronto Dominion Bank has been added to a global list of systemic banks that must hold extra capital, while Deutsche Bank has dropped a rank within the list, the Financial Stability Board said. The international body based in Basel, Switzerland, was updating its list of systemic banks, introduced in the aftermath of the global financial crisis a decade ago when taxpayers had to bail out struggling lenders. The addition of Toronto Dominion brings the total number of systemic banks to 30. Systemic banks are slotted into one of five buckets, although the fifth - where banks would be required to hold an extra 3.5 per cent of capital to risk-weighted assets on top of minimum requirements - remains empty. Toronto Dominion has been placed in the first bucket, with a 1-per-cent surcharge.

Xi wants trade deal

From Reuters: China wants to work out an initial trade pact with the United States and has been trying to avoid a trade war, President Xi Jinping said, but is not afraid to retaliate when necessary. “We want to work for a ‘phase one’ agreement on the basis of mutual respect and equality,” he told representatives of an international forum, according to a pool report. “When necessary we will fight back, but we have been working actively to try not to have a trade war. We did not initiate this trade war and this is not something we want.”

Lagarde on economic growth

From Reuters: The euro zone needs to create more of its economic growth at home, including via greater public investment, if it is to withstand weakness abroad and become more balanced internally, new European Central Bank President Christine Lagarde said on Friday. Lagarde did not discuss monetary policy in her first major speech since becoming ECB president at the start of this month, merely saying the central bank would continue to do its part to support the economy. Instead, she chose to send a message to euro zone governments, calling on them to strengthen domestic demand after a global trade war brought a decade of export-driven growth, largely led by Germany, to an abrupt end.

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Stagnating growth

From Reuters: Euro zone business growth has almost ground to a halt this month as a downturn in the manufacturing industry appears to be increasingly affecting the bloc’s dominant services industry, a survey showed. IHS Markit’s flash November composite purchasing managers index, seen as a reliable guide to economic health, slipped to 50.3 from October’s 50.6, moving to within a whisker of the 50 mark separating growth from contraction.

Merkel on 5G

From Reuters: Germany should not exclude any companies from contracts to build its 5G mobile network from the outset, Chancellor Angela Merkel said at a meeting of her Christian Democrats. at which Huawei’s German ambitions are a controversial issue. Some law makers in the Christian Democratic Union want China’s Huawei, which the United States fears could be used by Beijing for spying, to be excluded from 5G contracts. Ms. Merkel told the CDU party congress in Leipzig that Germany must ensure tight security standards, but added: “We shouldn’t exclude anyone from the outset.”

Japan tempers views

From Reuters: Japan’s government trimmed its assessment of the labour market in November for the first time in five years and also cut its view on corporate profits as slowing global growth weighs on the manufacturers. The government left unchanged its overall assessment that the world’s third-largest economy is recovering at a moderate pace, though prolonged weakness centered mainly on exporters has remained. The more subdued view on the employment and profit outlook for manufacturers could become a source of concern for policy makers.

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German GDP confirmed

From Reuters: Strong exports, state spending and consumers helped the German economy avoid a recession in the third quarter, detailed data showed, confirming a preliminary reading of a 0.1-per-cent expansion on the quarter. The Federal Statistics Office said exports grew 1 per cent in the quarter, which meant that net trade contributed half a percentage point to overall economic expansion.

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What analysts are saying today

“This morning was always likely to be dominated by the first appearance from the new [European Central Bank] governor, Christine Lagarde. However, there were few big ticket announcements to drive markets, given the impending strategy review that will help drive decision-making going forward. The one thing that Lagarde is sure to focus on is the need for greater investment on a national level, with the lack of unity over the current monetary policy stance ensuring that Lagarde will have to look for alternate methods of raising growth beyond the traditional monetary policy tools.” Joshua Mahony, senior market analyst, IG

[Purchasing managers indexes] across France, Germany and the euro zone almost universally missed expectations on Friday. The numbers deepen concerns over growth in the region. The longer the PMIs languish at these levels the lesser the prospects for a 2020 rebound. There is a mismatch between the expectations of purchasing managers and investors. That for us is a gaping hole in the middle of the huge gains in European stock indices this year … The one highlight was a bigger-than-expected pickup in German manufacturing. It was German manufacturing that led Europe into its latest malaise via the trouble in the auto sector and slowing global trade. This might be the first inkling of German manufacturing leading the rebound.” Jasper Lawler, head of research, London Capital Group

“Investors also need to be mindful that even if a phase one [U.S.-China trade] deal is agreed it still needs to be passed by the legislature of both countries. That is important given that the USMCA deal agreed between Mexico, Canada and the U.S. still hasn’t been signed off by U.S. policy makers almost a year after it was signed.” Michael Hewson, chief analyst, CMC Markets

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Required Reading

Poloz slams barriers

Bank of Canada Governor Stephen Poloz has criticized barriers that continue to hamper interprovincial trade, saying the lack of free trade among Canada’s provinces is “absurd,” David Parkinson writes.

Propane shortages

Quebec is in danger of running out of propane within five days if a CN Rail strike drags on, Premier François Legault warns, putting heating supplies for health-care institutions, seniors homes and farmers at risk. Nicolas Van Praet and Eric Atkins report.

Knowing when

Toronto-Dominion Bank CEO Bharat Masrani knows when to hold, or fold, when the stakes are high, Andrew Willis argues.

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