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business briefing

Briefing highlights

  • Speculators up the ante on loonie
  • Bank of Canada won't fan the flames
  • What to expect from Poloz this week
  • All eyes on Trump address Tuesday
  • Big bank earnings parade continues
  • Where earnings season stands so far

‘Bull bet’

Currency speculators are in the midst of their “biggest bull bet” on the Canadian dollar since last spring.

And one wonders whether they’re right or wrong in upping the ante amid so much uncertainty over President Donald Trump’s trade policy plans.

The latest reading from the U.S. Commodity Futures Trading Commission, released on Friday and measured as of last Tuesday, showed the net long position for the loonie rising to almost $1.9-billion, a bullish sign.

The Australian dollar also chalked up more on the long side of the ledger, as did New Zealand’s currency, though to a far lesser extent.

On the bearish side, with net short positions, were Mexico’s peso, the euro, the British pound, Swiss franc and yen.

“Investors lifted net AUD and net CAD longs but market timing looks poor, with the benefit of hindsight,” said Shaun Osborne, Bank of Nova Scotia’s chief foreign exchange strategist, and his colleague Eric Theoret, referring to the Australian and Canadian dollars by their symbols.

“The AUD has slipped on risk aversion and valuation concerns (near recent range highs) while the boost in net CAD longs (to the biggest bull bet on the CAD since May) looks odd in the context of a solidly range-bound market,” they said in a research note on the CFTC numbers.

There are a handful of reasons behind this, but “I’m not sure the level of interest in buying the CAD is really justified,” Mr. Osborne said later.

Among them are recent Canadian employment numbers that suggest the economy is doing well, he said on the weekend, but he believes job creation of 100,000 or so in December and January “overstates” where the economy really stands.

“Canada only created 214,000 jobs through the whole of 2016, after all. Plus, weak core inflation Friday suggests a lot of excess slack still in Canada.”

Also feeding into the loonie’s fortunes are firmer oil prices, buoyed by OPEC countries sticking to their recent output cut agreement.

Mr. Osborne also cited the seemingly “broader upswing” in the global economy, which tends to support commodity-linked currencies like the loonie.

“And finally, the [U.S. dollar] itself has been drifting generally lower since running up in the wake of the Trump election win. That has probably helped encourage some [speculative] longs in the CAD.”

The speculative showing for the Canadian dollar is consistent with the trend among commodity-linked currencies, added Bipan Rai, executive director of macro strategy at CIBC World Markets.

“It may not seem like it with all this talk of protectionism, but, oddly enough, sentiment for global growth amongst manufacturers is booming and this is supporting growth currencies like the loonie and leading to a build-up in positioning,” Mr. Rai said.

While the Canadian dollar has been relatively stable recently, at around 76 cents U.S., currencies have been in the spotlight since Mr. Trump came to power on promises to remake the trade regime, slamming certain countries for low valuations.

Mexico has been a prime target, which is why the fortunes of the peso had been such a proxy for Mr. Trump’s chances in the runup to the election.

Observers had warned that the new administration’s vow to renegotiate the North American free-trade agreement could harm Canada, and that the loonie could tumble to somewhere between 70 and 72 cents.

Since then, Mr. Trump’s team has made nice with Canada, suggesting only tweaks to NAFTA where we’re concerned, but analysts are still wary, warning even a small change could have an impact.

This is a big issue for the Bank of Canada, whose governor, Stephen Poloz, has already bemoaned the loonie’s recent rise amid hopes that a weaker currency would help drive exports.

Mr. Poloz may find some solace in the comments of Mr. Osborne, who, like other observers, stresses the divergence between the Bank of Canada and Federal Reserve, a dicconnect that is not loonie-friendly.

“I’m not sure the CAD is really an attractive buy,” Mr. Osborne said.

“We rather think it’s a sell, in fact,” he added.

“The Fed will tighten and the BoC will remain on hold this year most certainly. Oil prices are strong enough that U.S. output is on the rise again. There’s likely a natural cap on crude prices hereabouts. I’m not convinced the Canadian economy is quite as robust as the jobs data suggest (after weak retail sales and CPI last week).”

Poloz in spotlight

We may hear more on this front on Wednesday, when the central bank releases its policy statement.

The Bank of Canada isn’t expected to shift its benchmark overnight rate from the current 0.5 per cent, and observers believe it won’t say anything that could fuel the loonie.

“Governor Poloz likely remains concerned about the level of both the Canadian dollar and longer-term borrowing rates, both of which have been taken along for the ride as their U.S. counterparts have risen post-election,” said Toronto-Dominion Bank senior economist Brian DePratto..

“While higher rates are likely appropriate for the U.S., Canada remains at a different stage of the economic cycle, and we expect Governor Poloz to emphasize this fact once again in an effort to counteract rises in the currency and borrowing costs.”

Investors have been riding riding a wave of uncertainty, with Mr. Trump promising fiscal measures to juice the U.S. economy but providing little detail.

And so far, they appear to be taking him at his word, pushing stocks to new highs in anticipation of tax and trade reform.

Which is why all eyes will be on his address to a joint session of Congress Tuesday.

What else to watch for this week

There’s a lot for markets to digest over the next few days, starting with Mr. Trump’s Tuesday address.

“News reports suggest that White House officials view this speech as an opportunity for the president to pass the policy baton to Congress (after a multitude of unilateral executive actions thus far),” Tom Porcelli, Royal Bank of Canada’s chief U.S. economist, and his team said in a lookahead.

“Accordingly, it’s expected that Trump will outline key fiscal initiatives for 2017. Consensus is that tax policy is [a first half of 2018] event at the earliest, and therefore any concrete impact on these expectations from Trump’s speech could be market-moving.”

Then there’s the Bank of Canada policy statement on Wednesday, and, just before that, Statistics Canada’s look at the current account balance in the fourth quarter of 2016, in this case a deficit.

Economists believe the shortfall narrowed to about $10-billion.

“Exports rose firmly for a second straight quarter driven by rising commodity prices, while imports saw their largest decline in seven years (a reversal from the oil platform-driven rise in Q3),” said Bank of Montreal senior economist Benjamin Reitzes.

“The non-merchandise deficit, which widened sharply in the decade to 2013 due to the appreciating Canadian dollar, likely held steady, but remains in a narrowing trend, due to the softer loonie,” he added.

“Our estimate would peg the current account shortfall at around 1.9 per cent of GDP, a 1.7-percentage-point improvement from the average in the first three quarters of 2016.”

One day later, on Thursday, comes Statistics Canada’s measure of economic growth in the final quarter of last year.

Economists believe growth slowed, to an annual pace of about 2 per cent, after the previous quarter’s big rebound.

“True, part of the rebound in second-half activity was driven by the bounce-back in activity post-Alberta wildfires,” said Nick Exarhos of CIBC World Markets.

“But the strength in output also highlights Canada’s further recovery from the oil price shock, a reason to believe growth should be able to track 2 per cent or so for the next several quarters,” he added.

“That should be enough to chew through the slack that’s opened up in our economy over the past two years.”

Another semi-important measure will come Thursday from the euro zone’s statistics agency, this one on inflation, and worth watching because it’s the last look at consumer prices before the next meeting of the European Central Bank in early March.

RBC, for one, projects the annual February rate will come in at 1.9 per cent, then inch up to 2 per cent in March.

“With oil prices continuing to be the dominant determinant of the headline rate, the February print should continue to see core inflation largely unchanged even as the headline rises, allowing the ECB stick to its ‘lack of underlying inflation’ narrative to look through the increase,” said RBC economists.

Then there are the latest earnings reports, notably those from Canada’s big banks, which kicked off last week with stronger first-quarter profits and dividend increases from CIBC and RBC, as The Globe and Mail’s James Bradshaw reports.

Toronto-Dominion Bank, BMO, Bank of Nova Scotia, National Bank of Canada, Laurentian Bank of Canada and Canadian Western Bank report this week.

So, too, do several notable companies, including PrairieSky Royalty Ltd., Pengrowth Energy Corp., Valeant Pharmaceuticals International Ltd., Best Buy Co., Lowe’s Cos. Inc., Office Depot Inc., TransAlta Corp., Cascades Inc., George Weston Ltd., Martinrea International Inc., SNC-Lavalin Group Inc. and GMP Capital Inc.

“The earnings season continues to roll on, and results remain solid,” said BMO senior economist Robert Kavcic.

“With more than 90 per cent of the S&P 500 now reporting, 73 per cent have topped consensus earnings expectations according to Bloomberg’s tally, while 52 per cent have beaten the revenue mark – both results are consistent with recent solid norms,” he added, noting the tech sector has been a big winner.

“In Canada, just over half of the TSX has reported, and earnings growth is running much hotter thanks to easy year-over-year comparisons in energy and materials.”