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Business Briefing Key calls for 2018 on the Canadian dollar, housing, rates and NAFTA. (Oh, then there’s bitcoin)

Key calls for 2018 on the Canadian dollar, housing, rates and NAFTA. (Oh, then there's bitcoin)

Briefing highlights

  • What observers expect in 2018
  • Markets at a glance
  • Canadian manufacturing sales slip

Random thoughts

Some random observations, collected over the past few days from those in the know, as I prepare to break for the holidays:


"Below highlights what happens in the final year of a melt-up during a mania … and where bitcoin measures up. The greatest bubble of our lifetime!" David Rosenberg, chief economist, Gluskin Sheff + Associates

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"With the Fed expected to be more active than the Bank of Canada in reducing policy stimulus in the early part of the year, we expect Canada's dollar will weaken modestly. This underperformance against the U.S. dollar is forecast to be short-lived with the bank returning to rate hike mode early in the second quarter and oil prices expected to be range-bound for much of next year. On net, our forecast is that Canada's currency will trade between 75 U.S. cents and 80 U.S. cents in 2018." Royal Bank of Canada chief economist Craig Wright and the RBC economics team

"The Canadian curve has flattened this year, more sharply than most. Treasuries anchor longer-dated Canadian yields, but the move in the front end has caused a longer-term repricing. We're modestly bullish on both the [Australian and Canadian dollars], preferring both to the [New Zealand dollar] or the USD." Kit Juckes, chief foreign exchange strategist, Société Générale

"The [Canadian dollar] gained 12 per cent against the U.S. dollar during the summer, and this was probably too fast. The recent correction was due, but we expect the Canadian dollar to confirm durable gains over the medium term. The [U.S. vs. Canadian dollar] hit and bounced at a fresh 1.21 low last September, setting a new horizontal support, which is now quite distant from the current 1.28, leaving downside room." Olivier Korber, strategist, Société Générale

By that, he means the loonie at about 82.5 cents (U.S.) and just over 78 cents, respectively.

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Bank of Canada

"The Bank of Canada will remain in 'intense data-dependent mode' that requires confirmation of ongoing inflationary pressures to support further rate hikes. Our forecast sees the bank's key criteria being met, bringing the overnight rate to 1.5 per cent by end-2018." Toronto-Dominion Bank chief economist Beata Caranci and the TD economics team

"For governor [Stephen] Poloz, what keeps him up at night isn't wondering whether Quentin Tarantino will actually make a Star Trek movie (though it might be), but ongoing issues in the Canadian economy. Specifically, it is cyber threats, housing markets and household debt, and the state of youth employment that generate restless nights for the governor. However, in each case, Poloz made the point [in a speech Thursday] that progress is being made. Indeed, despite the speech ostensibly being about the governor's worries, it carried a somewhat hawkish bent. The three key areas of concern are seen as being addressed, at least on an ongoing basis. On top of this, while we were reminded that monetary policy is an exercise in risk management, ultimately Poloz sees the economy as being 'quite close to home' and has maintained a positive characterization of 2018 – something that suggests that we may be closer to the next hike than markets have been expecting of late. Ultimately, while the decision may come down to the wire, today's speech confirms our view that the next hike will likely come sooner rather than later." Brian DePratto, senior economist, TD

Bank of Canada governor Stephen Poloz

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Federal Reserve

"We expect the Fed will stay the course in 2018 and gradually raise the policy rate even when Jerome Powell takes over as chair in February, 2018. Powell appears to be cut of the same cloth as [current chair Janet] Yellen, preferring a gradual, consistent withdrawal of policy stimulus, although will likely have a lighter touch on the regulator front. We are maintaining our forecast the Fed will raise the funds target each quarter in 2018 to end the year at 2.5 per cent." RBC

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New Fed chairman Jerome Powell

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Even with all the geopolitical fireworks and uncertainty in 2017, the S&P 500 never saw so much as a 3-per-cent micro-correction for the entire year … The S&P 500 is headed for a total return of over 20 per cent, topped only by 2013 this decade, and the ninth consecutive year it has churned out a positive gain. That feat has only been matched by the tech boom stretch of 1991-99 - hence, another gain in 2018 will set a record 10th positive return year in a row for the S&P 500." Douglas Porter, chief economist, Bank of Montreal

"We believe the majority of Canadian-centric investors remain stuck within the trees and are missing the positive earnings growth, reasonable valuations, decent GDP growth, and low interest rates that represent the forest of Canadian equities." Brian Belski, chief investment strategist, BMO

Mr. Belski's "base case" for 2018: The S&P 500 at 2,950, and the S&P/TSX composite at 17,600.

His bull case: S&P 500 at 3,250, TSX at 19,000.

His bear case: S&P 500 at 2,200, TSX at 14,500.

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Housing markets

"The adjustment in the Toronto market is ongoing, but strong underlying supply-demand fundamentals should prove supportive next year once the remaining froth gets worked off (and we probably still have a bit more to go on this front). In all likelihood, Bank of Canada rate hikes and the coming rule changes from [the Office of the Superintendent of Financial Institutions] should keep the froth from returning. Elsewhere, look for continued strength in Ottawa and Montreal, stability in Alberta, and an ongoing supply-demand struggle in Vancouver." Robert Kavcic, senior economist, Bank of Montreal

"Canadian housing will exceed expectations, even with the new tighter OSFI rules, yet again crushing the bears' calls, if not their spirits. While not quite the bitcoin ilk, Canada's housing market has defied the incessant talk of its imminent demise for years." Mr. Porter

"Overall, we anticipate a continuation of the soft-landing narrative that has so far characterized dynamics in Canada's housing market. Higher mortgages, amid continued Bank of Canada interest rate hikes, will be a significant headwind on Canadian housing activity in 2018. However, still-solid employment and income growth should cushion the blow." Michael Dolega, senior economist, and Rishi Sondhi, economist, TD

"It likely will be difficult to discern the underlying market trends over the next few months. We expect market activity to be more volatile than usual as buyers and sellers strategize over the impact of the new mortgage rules. When the dust settles - which could be as late as in the spring - however, we believe that the combination of tighter mortgage rules, rising interest rates and poor affordability in several key markets will weigh on homebuyer demand in Canada. Our forecast calls for home resales to decline by 4.2 per cent to 488,000 units in 2018 following a 4.8-per-cent drop in 2017. It also calls for a sharp deceleration of prices from 11.1 per cent in 2017 to just 2.2 per cent in 2018 nationwide." Robert Hogue, senior economist RBC

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Household debt

"Canadian household debt ratios rose to a record high 171.1 per cent in Q3, and the prior few quarters were revised up more than two percentage points, leaving the ratio higher than anticipated … The upward trend in household debt, which started as far back as we have data (the series starts in 1990), continues unabated. And, with home buyers rushing to get into the market ahead of the new OSFI rule change that takes effect on Jan. 1, 2018, we could see a further increase in Q4. However, that suggests we could see some flattening out of the ratio in 2018 - though don't bet on it as housing has been persistently resilient. Note that the household debt service ratio (interest and principal as a share of disposable income … has risen over the past three quarters, but remains in line with levels that have prevailed since 2010, so no sign of stress there yet. Look for a continued creep higher as interest rates are likely to climb further in 2018, which is a reason for the BoC to tighten cautiously." Benjamin Reitzes, Canadian rates and macro strategist, BMO

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Canadian economic growth

"After flying high in the first half of the year, real GDP growth is slowly coming back down to earth. A 3-per-cent expansion in 2017 is expected to be followed by an above-trend 2.4-per-cent pace in 2018. We don't expect the economy to settle into a trend pace until 2019. Rising interest rates, elevated indebtedness and macroprudential measures will conspire to moderate residential investment and consumer spending, gradually nudging the economy back towards its long-term cruising speed." TD

"Canada is still on track to be the G-7's growth leader in 2017 with strong gains early in the year underpinning a 2.9-per-cent increase. We expect the economy to gear down in 2018, although still grow faster than the economy's potential growth rate. In 2019, as the impact of higher interest rates take effect, the economy is forecast to slow to 1.6 per cent - in line with potential. The drivers of Canada's economy are set to shift in 2018. After several years of consumer spending and housing activity acting as the main engines of growth, changes to regulations in the housing market and rising interest rates are setting up for a moderation in housing resales and ancillary purchases. Government spending will work to take up some of the slack as the federal government and several provinces continue their infrastructure spending initiatives. Business investment, which started to recover in 2017, is forecast to rise in 2018 with exports making a mild contribution on the back of solid global trade flows (in particular stronger demand from the U.S. industrial sector) that bump up demand for Canadian goods." RBC


Unemployment will hit a modern-day low in the OECD. While many continue to stress over robots stealing our jobs in the future, we are rapidly running out of workers in the here and now. By late 2017, jobless rates were approaching multi-decade lows in the U.S. (4.1 per cent), Canada (5.9 per cent), Japan (2.8 per cent), Germany (3.6 per cent) and even the U.K. (4.2 per cent). Given that we see global growth coming close to matching this year's solid gains in 2018, look for the job market to tighten notably further. With hiring plans remaining robust in many regions, the OECD harmonized unemployment rate will hit the lowest level in almost 50 years." Mr. Porter


"We believe that a consensus on 'renegotiating and modernizing' the North American free-trade agreement (NAFTA) will eventually be achieved, but that it is unlikely by the current deadline of end-March, 2018. A number of contentious demands have complicated the talks: tighter rules of origin for vehicles, a possible 'sunset clause' tied to periodic renegotiation of the agreement, abolition of Canada's supply-management systems, significant weakening of NAFTA's dispute-settlement mechanisms, and hard constraints on Canadian and Mexican involvement in U.S. government procurement … We expect that NAFTA will survive what could be an extended 'zombie' period where it is not clear if the pact will be renegotiated and modernized, but the United States has not withdrawn from it." Brett House, deputy chief economist, and Juan Manuel Herrera, economist, Bank of Nova Scotia

"The NAFTA negotiations have not gone well and the chances that President Trump will give the required six-month notice that the U.S. will withdraw from NAFTA sometime in the first half of next year have risen. That said, any withdrawal plans could get bogged down in court challenges and protracted political wrangling within the U.S. meaning NAFTA could potentially remain in effect in the intervening period. What would replace NAFTA is unclear. Possibilities range from relatively benign scenarios where NAFTA effectively reverts back to a bilateral free trade agreement between Canada and the U.S. Alternatively a reversion to World Trade Organization tariff rates would have a negative but manageable impact on the economy as a whole - albeit with a more concentrated impact on industries that trade a lot across the Canada/U.S. border. More extreme but lower probability outcomes could see the U.S. impose dramatic tariff hikes on particular industries. We treat the potential for tariff hikes next year largely as a downside risk in our forecast. Uncertainty about how the negotiations play out is likely already negatively impacting business investment. We expect business investment to rise in 2018, although have pared back our forecast due to the uncertainty created by the negotiations." RBC

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Markets at a glance

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