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business briefing

Briefing highlights

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

Guns of Navarro

The Trump administration is turning its “guns of Navarro” on Germany, accusing Berlin on the currency front and shooting down the U.S. dollar in the process.

The U.S. currency tumbled against others after one of Donald Trump’s trade adviser, Peter Navarro, told The Financial Times that Berlin is taking advantage of a “grossly undervalued” euro at the expense of America and other European Union countries.

Chancellor Angela Merkel responded by saying Germany supports an independent European Central Bank, and that Berlin couldn’t influence the euro, regardless.

Mr. Navarro’s comments fit with the theme of the new administration, that the U.S. dollar is too strong.

“Any pretence that the U.S. would be pursuing a so-called strong dollar policy appears to have been blown to shreds today after Peter Navarro, one of Donald Trump’s top trade advisers, took aim at Germany for implicitly targeting a lower euro in order to give itself a competitive advantage over its main trading partners, sending the U.S. dollar sharply lower,” said CMC Markets chief analyst Michael Hewson.

“While this overlooks the fact that the ECB sets monetary policy for the whole euro area, and not just Germany, this distinction isn’t likely to figure too highly with the new U.S. administration, which seems determined to upset the status quo in any way possible,” he added in a research note titled “The guns of Navarro blast the U.S. dollar.”

“Furthermore, it also serves to illustrate why Germany has probably done better out of the recent recovery in the euro area, largely down to its lower unit labour costs, relative to the rest of the euro area.”

The U.S. has a huge trade deficit with Germany, though the Trump team had been expected to turn their attention next to China, with which it has the widest shortfall.

The Canadian dollar, in turn, rallied on both the U.S. currency’s decline and slightly better-than-expected economic numbers from Statistics Canada, heading toward the 77-cent (U.S.) mark.

“I think it is a mix of both but largely the USD trade is unravelling a bit on the recent U.S. policy surprises,” said Mark McCormick, the North American head of foreign exchange strategy at TD Securities, referring to the greenback by its symbol.

“We have recently noted the combination of policy uncertainty (and market mispricing against this) and softer U.S. data had left the USD vulnerable to a position squeeze,” he added.

“The Trump administration has focused on a host of negative policy issues (at least from where the market’s growth outlook is concerned): trade, immigration and protectionism rather than possible growth-enhancing fiscal measures. Markets are repricing the perception that stimulus is not around the corner and Trump’s economic policies could increase the downside risks to the economy.”

The euro gained after the region also reported fresh economic readings, and then further after the comments from Mr. Navarro, who heads Mr. Trump’s National Trade Council.

“The Trump administration appears to be targeting currencies as part of its goal of realigning global trade back in favour of the U.S. worker,” said Jasper Lawler, senior market analyst at London Capital Group.

“A weaker dollar on top of import tariffs will be another disincentive for U.S. companies to manufacture abroad,” he added.

“The comments from Donald Trump’s team will irk Angela Merkel’s Germany. The truth hurts. It’s well understood that the euro is weaker than the Deutsche Mark and stronger than the Spanish peseta or Greek drachma would have been, which tilts trade in favour of the more industrious Germany.”

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.