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business briefing

Briefing highlights

  • What Scotiabank says about loonie and oil
  • Bank sees currency at about 71.5 cents
  • Péladeau returns as Quebecor CEO
  • Bombardier narrows quarterly loss
  • Cenovus swings to profit
  • Encana cuts 2016 losses
  • TransCanada posts smaller loss
  • Snap sets valuation at as much as $22.2-billion

What Scotiabank says of loonie

Bank of Nova Scotia still believes the Canadian dollar is heading down to below 71.5 cents (U.S.) by the middle of the year.

But there’s so much more to it than just the number, which would mark a drop of about a nickel from about 76.5 cents now, and which is why the bank is frequently being asked about it by clients.

In particular, what’s the loonie’s correlation with oil? Or actually, the “apparent lack of one” at this point.

“Recent history and the characterization of the CAD as a ‘petro-currency’ suggests a strong and persistent, positive correlation between crude oil prices and the CAD,” Scotiabank currency strategists Shaun Osborne and Eric Theoret said in a report, referring to the loonie by its symbol.

“But it was not always so and probably overstates the CAD’s relationship with crude oil to some extent,” added Mr. Osborne, the bank’s chief foreign exchange strategist, and his colleague Mr. Theoret.

“Evolving financial and economic conditions and priorities mean these relationships should always be treated as dynamic rather than static. Yes, we expect crude oil prices to rise, modestly this year; but no, we do not think the CAD will necessarily strengthen materially as a result.”

Mr. Osborne and Mr. Theoret aren’t fond of calling the loonie a petro-currency because there’s much more to Canada’s economy.

True, crude production has climbed, to about 4.5 million barrels a day in 2015 from one million in the 1970s, and thus is key to Canada’s fortunes. But the “relative importance” of the oil and gas industry to the economy has shrunk to about 8 per cent currently from 10 per cent in 2000.

Having said that, its share of exports has climbed to 12.5 per cent from 2.5 per cent in the same period, which plays into the “positive relationship” of the loonie.

Also at play is currency conversion.

“Resources generally are priced in [U.S. dollars] and Canadian producers/exporters have to convert proceeds to pay the bills at home; the higher the price or the more crude Canada exports, the more [U.S. dollars] receivable have to be converted or hedged to cover domestic costs,” Mr. Osborne and Mr. Theoret said.

“We also think, more simplistically, that commodity currencies are sensitive to swings in commodity prices because speculative investors treat developments as a real-time snapshot of the underlying economy – higher oil prices are good for the Canadian economy and good for growth, and vice versa.”

The correlation between crude and the currency has certainly grown stronger over time, they added, but has recently eased. At the same time, short-term Canada-U.S. rate spreads have become more important for the loonie.

“Higher oil prices alone might support the notion of a somewhat stronger CAD perhaps, but not significantly so,” said Mr. Osborne and Mr. Theoret, whose bank projects oil prices will average $58 (U.S.) a barrel this year and $61 in 2018.

“We think crude oil needs to break higher out of the well-established $50-55 range to have a more material impact on the CAD at the moment, especially considering a CAD/crude correlation that is softening right now.”

There ’s also the divergence in interest rates, with the Bank of Canada expected to hold steady for some time yet, while the Federal Reserve is in the midst of a hiking cycle.

As Scotiabank sees it, the U.S. central bank will raise its benchmark rate three times this year and twice next, each time by one-quarter of a percentage point.

Many economists expect the Bank of Canada to wait until next year to start raising its key overnight rate, and even then, according to Scotiabank, just twice starting in mid-2018.

Péladeau back

Pierre Karl Péladeau is returning as head of Quebecor after his stint with politics.

Mr. Péladeau, who resigned last year as leader of the Parti Québécois, is back at the media company as chief executive officer and president, Quebecor said.

“The corporation is dear to my heart, it is in sound financial health, and has grown steadily in recent years,” said Mr. Péladeau, who had run the company for 14 years before politics.