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Why this economist warns the Canadian dollar will slump to 70¢ next year, even if NAFTA’s resolved

Briefing highlights

  • Analyst sees loonie at 70 cents
  • A Cheech & Chong scene I’d love to see
  • Constellation pumps billions into Canopy
  • Canopy shares surge on deal
  • Investors in sour mood
  • New York poised for weaker open
  • Turkish fears intensify
  • Banks better prepared for housing shock
  • U.S. retail sales up sharply
  • Metro’s quarterly profit slips

Loonie to 70 cents?

Stephen Brown believes the Canadian dollar will slump to about 70 US cents next year, even if the uncertainty over NAFTA ends with a deal.

“A quick NAFTA deal is an upside risk to our forecast for the loonie to remain near its current rate against the U.S. dollar this year,” said the senior Canada economist at Capital Economics in London.

“But our forecasts for various commodity prices to decline and interest rate differentials to move against Canada imply that the loonie will nevertheless depreciate in 2019.”

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Prospects for the currency have suffered since President Donald Trump was elected, and pledged to remake the North America free-trade agreement or kill it outright.

“That is, the heightened risk of a U.S. withdrawal [from NAFTA] has directly caused investors to demand a higher premium to hold Canadian assets, while the negative implications of uncertainty for the economic outlook has weighed on interest rate prospects and thereby the currency,” Mr. Brown said.

Now at about 76.5 US cents, Capital Economics expects the loonie to end 2018 at 75, but then erode further to around the 70-cent mark - though it could get a short-term bump should NAFTA be resolved, Mr. Brown added in an interview.

Indeed, a NAFTA deal could bump his forecast up by three cents or so.

“Even if a deal is reached, it is unlikely to be as positive for Canada as the current one and it would still take at least three months for it to be fully signed off, during which its future would remain in doubt,” he noted in his report.

“In any case, absent any safeguards, investors and firms are likely to remain wary of Canadian assets and the loonie while Trump is in charge, and perhaps even longer.”

For comparison, CIBC World Markets said in its latest outlook that it expects the loonie to trade between about 74 and 78 US cents through next year.

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A Cheech & Chong scene I’d love to see

Buzz kill

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Constellation pumps up Canopy

The marriage of booze and bud is going deeper.

Constellation Brands, the beer, wine and alcohol company, is pumping $5-billion into Canopy Growth by boosting its stake in the cannabis concern, sending Canopy’s shares surging.

Constellation is buying 104.5 million additional shares at $48.60 each, which, when all is said and done, would bring its ownership to about 38 per cent.

Constellation is also getting additional warrants that, if it exercises them, would mean a further $4.5-billion, the companies said.

“Over the past year, we’ve come to better understand the cannabis market, the tremendous growth opportunity it presents, and Canopy’s market-leading capabilities in this space,” Constellation chief executive officer Rob Sands said in a statement.

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Stocks sink

Stock investors are in a sour mood again.

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Tokyo’s Nikkei lost 0.7 per cent, Hong Kong’s Hang Seng 1.6 per cent, and the Shanghai Composite 2.1 per cent.

In Europe, London’s FTSE 100, Germany’s DAX and the Paris CAC 40 were down by between 0.9 and 1 per cent by about 7:45 a.m. ET.

New York futures were also down.

“The Turkish crisis continued to rumble on, with a growing fear that this issue could spill over into a wider emerging markets selloff,” said IG market analyst Joshua Mahony.

“Erdogan has predictably taken up the fight with the U.S., with a boycott of U.S. technologies called while also encouraging producers to ramp up exports amid a tumbling lira,” he added.

“Much of the worries stem from the loss of central bank governance and Erdogan’s aversion to interest rates. However, with the central bank offering liquidity to banks at a 150-basis point premium being perceived as a form of rate hike.”

The lira rose again today, having collapsed amid Turkey’s economic woes.

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