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Briefing highlights

  • U.S. dollar rally stalled: Société Générale
  • Canadian dollar at 75.5 cents
  • Sears Canada flags doubts, seeks buyer
  • BMO now sees January rate hike
  • Shaw to sell ViaWest unit for $2.3-billion
  • Oil sands firms to cut spending
  • U.K. inflation at almost four-year high

Death of the U.S. dollar rally

Some of us may have to crack open the history books for this forecast from Société Générale:

“The third big U.S. dollar rally of the post-Bretton Woods era has stalled. At current levels, it’s significantly overvalued, and a shift in the relative momentum of economic growth and monetary policy from the U.S. to Europe suggests that new highs are unlikely.”

That call from Kit Juckes, chief foreign exchange strategist at Société Générale, is among the projections in a lengthy outlook for how world currencies will fare in the second half of the year.

Declaring that “the dollar’s descent has begun,” Société Générale also suggested that “the way down will be anything but straight.”

Dollar bears may suffer some indigestion on the way down as the Federal Reserve tightens policy slowly.

And the “clearest winner” will probably be the euro because the European Central Bank under chief Mario Draghi can’t return to normal policy and still expect the currency to hold at current levels, Mr. Juckes said.

“We’re torn between an image of the dollar heading downhill and one of the euro rising out of the depths,” the Société Générale report said.

“But let’s face it, the U.S. authorities never wanted a strong dollar any more than Mario Draghi wants a strong euro.”

(The Bank of Canada doesn’t want a strong loonie, either, though the currency is rallying in the wake of a more upbeat outlook Monday from senior deputy governor Carolyn Wilkins.)

Mr. Juckes believes economic growth in the U.S. is going to slow over the next several years, that President Donald Trump’s honeymoon is over, that his current account deficit is on the rise, and that higher interest rates in other countries will mean a competition for foreign money.

“At best, the dollar will bump around without falling significantly, but that’s not really what happens in the [foreign exchange] market – after the two previous significant peaks, it fell pretty sharply, by 15 per cent in real terms in the year after the 1985 peak and nearly 5 per cent after the 2002 peak,” he said.

“If we use the simplest valuation method, purchasing power parity (PPP), the dollar is 30 per cent overvalued on average against the currencies of five geographies that make up 70 per cent of U.S. trade (China, the eurozone, Canada, Mexico and Japan),” Mr. Juckes added.

“The yuan and peso account for most of the dollar’s overvaluation, which tells us something about the limited usefulness of emerging market PPPs, but it is overvalued against all five on pretty much any metric, and that certainly plays its part in U.S. policy and therefore in capping the dollar.”

Which brings us to the Canadian dollar, which Société Générale and others saw gaining ground even before Monday.

Some recent forecasts, made over the past several days, came before Ms. Wilkins sent the loonie surging as markets speculated on the timing of a Bank of Canada rate hike. Which may well have observers recalculating their projections.

Indeed, Bank of Montreal, for one, now projects the first rate hike in January, moving forward its earlier projection of next April.

“The Canadian economy has been an outperformer, but there’s still reason to believe that the loonie will remain soft in the near term,” CIBC World Markets said today.

“A weak currency is a necessary component to see exports rise, so expect Governor [Stephen] Poloz to remain patient in lagging the Fed on rate hikes,” the bank added.

“That said, given the recent change in tone, it appears he can only wait so long. As a result, the loonie should begin looking a little stronger around the turn of the year.”

Société Générale’s recent outlook puts the loonie at just above 74.5 cents by September, 75.8 cents by the end of the year, almost 77 cents by next March, and 78 cents by mid-2018.

Despite economic uncertainties, the loonie still has some things going for it, said Société Générale’s Alvin Tan.

“The first is that crude oil prices are expected to rise moderately in the coming months from the OPEC output cut,” Mr. Tan said.

“Given the tight link between the CAD exchange rate and oil prices, such a development would be positive for the loonie,” he added, referring to the currency by its symbol.

“The second is that the trade-weighted U.S. dollar has peaked in our view.”

JPMorgan Chase has different forecasts, though, like Société Générale, had the loonie perking up. It suggested a loonie at 72.5 cents by September, 73 cents by the end of 2017, 73.5 cents by March, and just above 74.5 cents midway through next year,.

The latest outlook from CIBC World Markets runs through to the end of next year, looking for 75 cents by mid- and late-2018.

Then there’s Royal Bank of Canada, which had a weaker projection to start with: Just shy of 72 cents in the third quarter, and below 71.5 cents in the fourth.

That’s when the bloodletting stops, RBC believes, expecting the currency to pick up to 72.5 cents early next year, about 74 cents by the third quarter of 2018, and above 75 cents to close out the year.

Sears Canada eyes options

Sears Canada Inc. is raising mounting doubts about its future, saying it’s now looking at a restructuring or sale of the embattled retailer.

“Based on management’s current assessment, cash and forecasted cash flows from operations are not expected to be sufficient to meet obligations coming due over the next 12 months,” the company said today amid rising losses.

“In order to address the need for additional liquidity, the company had expected to be able to borrow up to an additional $175-million (before transaction fees) secured against its owned and leased real estate as part of the second tranche of its existing term loan,” it added.

“Based on the current status of negotiations with the lenders, the amount that the company expects to borrow under the second tranche has been reduced to an amount up to $109-million (before transaction fees).”

The lack of funds in a “timely manner” means Sears may not be able to meet its obligations, all of which raises “significant doubt as to the company’s ability to continue as a going concern.

Sears has been trying to remake itself, and said it believes it has regained customer confidence as it sees stronger same store sales, but is looking at other options, The Globe and Mail’s Marina Strauss reports.

“The company recently commenced a process to address its liquidity situation and to finance its business and preserve and grow its franchise and brand reinvention,” it said.

“Such alternatives may include a financial restructuring or sale of the company.”

It has struck a special committee, and hired BMO and law firm Osler, Hoskin & Harcourt as advisers.

While same-store sales rose 2.9 per cent in the first quarter from a year earlier, revenue tumbled 15.2 per cent to $505.5-million.

Sears posted a quarterly loss of $144.4-million, or $1.42 a share, wider than the hit of $63.6-million or 62 cents a year earlier.