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business briefing

Briefing highlights

  • What if the loonie doesn't fall?
  • Economy expands 0.4% in November
  • Toronto realtors see another surge

Devil's advocate

Bipan Rai was playing Devil’s advocate when he asked this week what could happen if the Canadian dollar grows stronger.

The executive director of macro strategy at CIBC World Markets wasn’t saying that’s necessarily going to happen, but he did cite several developments that could alter the views of some investors.

At this point, Mr. Rai said, most domestic investors believe the loonie will tumble over the longer-term, or within about a year.

Indeed, he added, “fair value” for the currency is lower, so that should happen to the loonie, which popped today.

Until recently, most observers projected a fall in the loonie to somewhere between 70 cents (U.S.) and 72 cents, and possibly lower, as the policies of the Canadian and American central banks diverge and amid fears we could be wounded by U.S. trade measures under President Donald Trump.

Certainly the former still stands, and we may get more of a sense of timing on Wednesday when the Federal Reserve releases its policy statement, which investors will scour for hints of the timing of further rate hikes.

And certainly Canada should still be wary of the latter heading into the renegotiation of the North American free-trade agreement, but it’s all now a big question mark given the latest signals from the Trump team, which so far has targeted Mexico and is expected to next turn its eye to China.

“First, Trump business advisers have strongly hinted that Canada won’t suffer significant collateral damage during NAFTA talks,” Mr. Rai said.

“We’ve gone from uncertainty to ‘less’ uncertainty on the issue of Canada-U.S. trade,” he added in a recent report.

“Sure, there might be issues with some industries, but it appears that we’re still a long ways away from a repeat of the ‘30s-era Smoot-Hawley tensions. Second, trade issues have escalated between the U.S. and Mexico. Putting aside the insanity of border taxes, a package that is aimed at curbing Mexican imports may be interpreted as bullish for Canadian goods exports to the U.S.”

Then there’s oil, and the fact that at least some of last week’s gains in the loonie were attributed to Mr. Trump’s decision to revive TransCanada Corp.’s Keystone XL pipeline project.

“Canada’s crude sector is poised to benefit,” Mr. Rai said of Mexico being the target.

“Canadian heavy-grade WCS competes directly with Mexican Mayan crude in the U.S. market. The approval of Keystone XL is an additional tailwind.”

Also at play are better signals from the manufacturing sectors of large economies, which, Mr. Rai said, have helped support certain commodities and, with them, commodity-linked currencies such as the loonie.

The divergence between the Fed and the Bank of Canada “can’t be ignored,” Mr. Rai said in his report, and that could buoy the U.S. dollar against the loonie heading into March if investors “reprice” the timeline for American rate hikes.

“Most domestic investors think that the loonie should fall over the longer-term, which makes near-term strength ‘painful,’” he said later.

“Futures markets are already moving the other way with positioning now modestly net long CAD,” he added, referring to the loonie by its symbol.

Speaking of painful, the Bank of Canada has already warned that the recent strength of the loonie, which has been pulled up against other currencies along with the U.S. dollar, counts as a blow to exports.

Governor Stephen Poloz and his central bank colleagues, remember, are counting on a lower currency to help buoy exports and give the economy a needed lift.

Which is among the reasons for the fretting over trade tensions.

“All told, U.S. protectionism could do more than just derail Canada’s plan for export resurgence, which itself was meant to provide vital offset to the inevitable pullback in overheated housing markets and related consumer spending,” said National Bank economists Krishen Rangasamy and Warren Lovely.

“It would keep the country’s economic growth model skewed to housing/consumer spending to an unhealthy extent,” they added in a recent study.

“In other words, the Bank of Canada’s desire to see a ‘great rotation’ from domestic demand to exports would remain unfulfilled.”

The so-called border adjustment tax to which CIBC’s Mr. Rai was referring is a huge threat, though many observers believe it may well not come to pass given that it’s a Republican congressional push and not one of Mr. Trump’s initiative.

If the worst actually did happen, though, trade barriers such as the border tax could crush non-oil exports to the U.S. by almost 11 per cent, bringing total goods exports down by about 9 per cent, and, thus, cutting economic growth by about 1.5 percentage points, said Mr. Rangasamy and Mr. Lovely.

Which, in turn, would slam the loonie.

“That could leave Canada even more reliant on capital inflows and may necessitate a much cheaper Canadian dollar,” they said.

“So trade decisions made in Washington could ultimately end up influencing how actively Canada needs to court foreign capital.”

Deutsche Bank senior currency strategist Sébastien Galy agreed, saying the loonie would have to soften by 10 per cent to make up for such a border adjustment tax.

“To achieve this, the Bank of Canada needs to cut once and threaten [quantitative easing], while the rest of the move would theoretically come from the [U.S.] dollar,” he said.

Economy expands 0.4%

Canada’s economy rebounded from an October slump to expand by 0.4 per cent in November, a shade better than expected by analysts.

It was the fifth expansion in six months, Statistics Canada said, driven by manufacturing, mining and the oil and gas sector, among others.

Interesting findings on manufacturing, which rebounded from a 1.7-per-cent decline in October to a gain of 1.4 per cent in November.

“With the exception of October, output in the manufacturing sector has risen every month since June,” the federal agency said.

Also interesting is that the real estate and rental industry fell for the first time since mid-2012.

“Real estate agents and broker activities decreased 6.2 per cent in November, following lending rule changes that came into effect in mid-October,” Statistics Canada said, referring to new federal rules.

“This reduce activity in real estate also had an impact on legal services, which declined 2.6 per cent.”

The sector has also been hit by a provincial tax on foreign buyers of Vancouver area homes.

Home sales to surge again

Toronto’s housing market is in for another red-hot year, the area’s real estate board says in a new forecast.

The Toronto Real Estate Board predicted 110,000 resale homes would change hands in 2017 – the third straight year with sales above 100,000 – while average resale home prices would rise between 10 and 16 per cent to $825,000 in 2017, The Globe and Mail’s Tamsin McMahon reports.

The TREB forecast calls for the Greater Toronto Area market to experience only a minor cooldown compared to last year, when resale activity jumped 11.8 per cent to 113,133 transactions and average prices soared 17.3 per cent to $729,922.