Briefing highlights
- What to expect from the Bank of Canada
- How the Canadian dollar could react
- Loonie at about 77.5 cents
- Markets at a glance
- CN apologizes, pledges action
- Canada’s trade deficit narrows
- U.S. trade gap at nine-year high
Patient and patient
Analysts differ on how many times the Bank of Canada will raise interest rates this year, but they generally agree on two things: It won't do it today, and it can be patient in the face of uncertainty.
They also differ on exactly where the Canadian dollar is headed, but they generally agree on one thing: The loonie is a patient, ailing in the face of the same uncertainty.
So don't expect Bank of Canada governor Stephen Poloz, senior deputy governor Carolyn Wilkins and their colleagues to raise their benchmark overnight rate from its current 1.25 per cent this morning.
But you might expect the currency to bounce around depending on what they say. And, for that matter, whether President Donald Trump or U.S. administration officials have anything more to say on steel and aluminum tariffs and the North American free-trade agreement.
It's already suffering from the resignation Tuesday of Mr. Trump's key economic adviser.
"The loonie's behaviour will be driven by how the market perceives the tone of the statement," said Bipan Rai, executive director of foreign exchange strategy at CIBC World Markets.
"In particular, it feels like the Street is expecting a dovish statement with a lot of attention to be placed on how much prominence the external sector (or trade) takes," he added.
"Let's not forget that the bank flagged [trade] as an area of concern in [its last monetary policy report]. Additionally, the bank will have to state the obvious - that the trajectory of growth in the real economy is lower than their projections."
The currency is at 77.5 US cents this morning.
Interest rates
The central bank has already raised its key rate once this year, though it's still cautious because of trade issues and the impact of that hike on consumers.
Bank of Canada Senior Deputy Governor Carolyn Wilkins and Bank of Canada Governor Stephen Poloz listen to a question during a news conference in Ottawa, on Wednesday, Jan. 17, 2018.
Adrian Wyld/THE CANADIAN PRESS
There's now a spread among analysts over what to expect, with some suggesting just one more rate hike this year, and others who see up to three more.
"We continue to expect only one more hike from the bank this year, with the next one to come in the summer," said Mark McCormick, North American head of foreign exchange strategy at TD Securities.
Laurentian Bank Securities agreed.
"The softer-than-expected trend in economic growth observed in late 2017, and the intensifying risk of a trade war are good reasons for the BoC to stay cautious, even though the January [consumer price index] report showed further acceleration in consumer inflation," said its chief economist, Sébastien Lavoie.
"Following the mid-January hike, we have been expecting only one more 25-basis-points policy rate increase this year. Given these new disappointing developments for the Canadian outlook, we remain comfortable with our call."
Those disappointing developments include the recent measure of fourth-quarter growth, an annual pace of just 1.7 per cent, thus below the Bank of Canada's projection of 2.5 per cent, along with Mr. Trump's threatened tariffs.
"There are enough uncertainties looming over the outlook that there's no rush for the BoC to tighten again in the near term," said Benjamin Reitzes, Bank of Montreal's Canadian rates and macro strategist.
"Expect a cautious tone, but no sign that the bank will back off its tightening trajectory."
Bank of America Merrill Lynch expects the Bank of Canada to raise rates three more times this year, the next time being in mid-April, and follow it up three times in 2019.
"We expect a faster hiking cycle than what the market is pricing and what the analyst consensus expects," Carlos Capistran, its Canada and Mexico economist, rates strategist Ralph Axel and currency strategist Ben Randol said in a lookahead to today's decision.
"We expect more hikes as we believe strong GDP growth in the U.S. will likely spread to Canada, making the labour and goods markets tighter," they added.
"We also believe rising U.S. inflation will likely push the [Federal Reserve] to continue its gradual hiking cycle, which would in turn push the BoC to hike, as well."
The Canadian dollar
Then there's the loonie, which Merrill Lynch's Mr. Randol referred to as "risky business."
Despite the fact he sees the Bank of Canada moving in relative lockstep to the Fed, he still sees trouble for the currency.
"External sector risks are worsening, Canada's financing requirement remains large, and hot money flows are decelerating fast," Mr. Randol said.
"A scenario of persistent investment uncertainty and/or NAFTA demise could mean double-digit CAD depreciation," he added, referring to the loonie by its symbol.
The loonie started off in early February at about 81.5 US cents and then tumbled, to a low just shy of 77 US cents Tuesday. It then perked up as the U.S. dollar weakened as fears eased of a global trade war, though any comments from U.S. officials could easily change the scenario.
As for the Bank of Canada today, "if a dovish statement is the base case scenario, the risks are skewed in the opposite direction, to a degree," said CIBC's Mr. Rai.
"The market has moderated BoC pricing for the rest of this year over the past few weeks, and the CAD has already sold off aggressively in response. Also, despite the Q4 GDP miss, domestic final demand has held in well despite the higher rates, so the bank may want to communicate that it's still on a tightening path."
Given that the market expects a dovish statement today, "it would take a major dovish shift in communication to take us above the 1.3000 mark on a sustained basis," Mr. Rai said, meaning a loonie at just below 77 US cents.
"The risk is slightly skewed towards a less-dovish-than-expected statement, which implies downside risk to USD/CAD - especially if the 1.2920 level is taken out."
Downside risk to the U.S. vs. the Canadian dollar, of course, means upside for the loonie. And 1.2920 translates to almost 77.5 US cents.
TD's Mr. McCormick has three scenarios for this morning, and he expects a "dovish" statement from the central bank.
That's his base case, with a 65-per-cent probability. That, in turn, would see the loonie at just below 77.5 US cents.
An "uber dovish" statement, a 25-per-cent probability that would cite threats to the economy, trade issues, housing questions, high consumer debts and export weakness, would drive the currency to below 77 US cents.
And a hawkish comment, which Mr. McCormick puts at a 10-per-cent chance and would talk about the need to raise rates, an as-expected economic outlook and a faster rise in core inflation levels, would push the loonie up to almost 78.5 US cents.
Read more
- Stephen Poloz’s life just got a lot more complicated: The week ahead
- Joanna Slater, Adrian Morrow: Free trade goes out the door with resignation of Trump economic adviser Gary Cohn
- Barrie McKenna: Poloz summons his inner Mark Carney, speaks out on public policy
- Canadian dollar goes south (so maybe you shouldn’t)
- ’Dead CAD bounce’: Why TD sees the Canadian dollar as ‘our favourite short’
- Crazy as a loon: The chasm in forecasts for the Canadian dollar
- Loonie pops 1¢ in a day as markets kiss ‘immensely unloved’ greenback goodbye
- Stock market angst: You want the good or bad news first? (Then let’s talk about the Canadian dollar)
Markets at a glance
Read more
CN apologizes, pledges action
Canadian National Railway Co.'s new interim chief is taking the rare step of apologizing to customers in the wake of grain troubles, and pledging steps to immediately fix its woes.
"We apologize for not meeting the expectations of our grain customers, nor our own high standards," Jean-Jacques Ruest said in a statement today after the departure of the railway's former chief executive officer earlier in the week.
"The entire CN team has a sense of urgency and is fully focused on getting it right for farmers and our grain customers, regaining the confidence of Canadian businesses, and protecting Canada's reputation as a stable trade partner in world markets."
The company is offering incentives for "key" operating staff to delay retirement and vacations, and is asking recently retired employees to come back.
It's also putting on extra trains and staff in Western Canada, and has leased 130 locomotives to boost its capacity in the region.
CN also said it would pump $250-million into new track and yard capacity in the west this year.
Read more
- CN apologizes, promises immediate action to clear backlog of grain shipments
- Eric Atkins: CN CEO Luc Jobin departs amid backlog of rail shipments
Trade gap narrows
Canada's trade surplus is narrowing, while America's is growing fatter, so watch for what Mr. Trump has to say today.
The Canadian gap narrowed in January to $1.9-billion, from December's $3.1-billion, Statistics Canada said today, as imports fell 4.3 per cent, outpacing a 2.1-per-cent drop in exports.
"Despite a narrower trade deficit in January, the details of today's release suggest that the sluggishness continued into 2018," said Andrew Grantham of CIBC World Markets, referring to the fact that the deficit narrowed only because of the faster drop in imports.
"Indeed, exports were down 2.1 per cent in nominal terms and were even weaker in real terms," he said.
"That's a bad indicator for monthly GDP, and with ongoing NAFTA discussions and recent tariffs on steel and aluminum clouding the outlook for trade as well, there's reason to expect an even more cautious tone from the BoC with respect to that part of their forecast later this morning."
The U.S. trade gap, in turn, widened to US$56.6-billion, the fattest in about nine years and up from US$53.9-billion.