Briefing highlights
- Canadian dollar to depreciate: TD
- Canada’s gross government debt
- Markets at a glance
- A look at Lyft, tech IPOs
- Iceland’s WOW Air halts operations
- HUD accuses Facebook of housing discrimination
- Dollarama slightly misses estimates
- From today’s Globe and Mail
The loonie’s fading outlook
The Canadian dollar faces a period of “broad and sustained depreciation,” threatening to sink this year to as low as about 71.5 US cents, TD Securities says.
For investors, that means the loonie “has become a sell on rallies,” said Mark McCormick, North American head of foreign exchange strategy.
“CAD’s strategic outlook has deteriorated considerably,” Mr. McCormick said in a new outlook today, referring to the currency by its symbol.
There’s a lot at play here, notably the Bank of Canada’s pause on raising interest rates. Higher rates, of course, are loonie-friendly.
Some analysts still see the central bank poised to raise its key overnight rate from its current 1.75 per cent after this period of economic uncertainty, while others believe it could actually cut the benchmark.
TD believes the Bank of Canada is done, with no further increases in the pipeline.
“The growth outlook has dimmed since last month as energy shutdowns start to bite during a time of global moderation,” Mr. McCormick said.
“Furthermore, recent data suggest Canadian consumers are struggling to adjust to higher rates and we have yet to see any signs of recovery in business investment,” he added.
“While energy normalization will support growth going forward, other headwinds may prove more persistent. Accordingly, we think 1.75 per cent will mark the top of the cycle for the BoC.
Which means a change in the outlook for the Canadian dollar given the pace of economic growth has slowed beyond what was expected.
’Coupled with the expectation that the BoC has completed its tightening cycle, the CAD's return profile is asymmetrically skewed to the downside,” Mr. McCormick said.
“Not only does the domestic economy look woeful, but external dynamics (awful BOP) should put the CAD on a path of broad and sustained depreciation,” he added, referring to Canada’s balance of payments.
“Risks are skewed to 1.35-1.40 in USDCAD this year.”
Those numbers means the loonie versus the U.S. dollar could trade between about 71.5 and 74 US cents.
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- ‘When it comes to the loonie, sell strength at every opportunity’: Analysts cut their Canadian dollar forecasts
- How the Canadian dollar bulls got crushed
Deep government debt
<b>Gross</b>
— Oxford Living Dictionaries
There’s a good reason to call it gross government debt where Canada is concerned.
The question, asks National Bank of Canada, is whether it will cost us.
National Bank’s Warren Lovely and Sandra Kagango pondered this after Fitch Ratings, one of the world’s big three agencies, fired a shot at Canada’s governments in response to federal Finance Minister Bill Morneau’s budget last week.
To be clear, Fitch said Mr. Morneau’s projected deficits “remain consistent with a falling federal debt burden.” But then there was this bit:
“Canada’s gross general government debt, combining federal and provincial fiscal accounts, is higher than other ‘AAA’ rated sovereigns, excepting the U.S., and remains close to a level that is incompatible with ‘AAA’ status. We continue to forecast the general government debt ratio to fall toward 85 per cent of GDP over the medium term.”
That, of course, raised the spectre of Canada losing that triple-A rating at some point, and also raised some eyebrows.
“Canada has been a proud, card-carrying member of the elite ‘AAA’ club for years, so this notice generated attention – particularly with a Conservative opposition ready to pounce across the aisle,” said Mr. Lovely, National Bank’s head of fixed income, currencies and commodities strategy, and Ms. Kagango, his colleague and strategist.
In their report, Mr. Lovely and Ms. Kagango listed several reasons why it’s not as bad as it might appear, among them that this wasn’t the first such comment from Fitch.
First, general government gross debt “is about as all-encompassing as one can get when it comes to public sector indebtedness,” Mr. Lovely and Ms. Kagango said.
“For a country like Canada – that (a) has deliberately built up a stock of financial assets over the years, some debt-financed, and (b) has more debt sitting at lower levels of government – distinctions between gross vs. net debt, and general vs. central government, are critically important,” they added.
“Few countries have squirreled away relatively more in prudential liquidity, investment accounts, sinking funds and other financial assets as Canada, where there’s also an enormous assist from an actuarially sound social security system.”
Then there’s the fact that debt isn’t the only thing taken into account when rating a country’s credit, and Canada “has been getting pretty high marks” in other areas.
Notable, too, is that, as Fitch pointed out, Canadian deficits still point to a declining debt burden.
“This is significant when seemingly close to a ratings threshold, as it speaks to momentum,” Mr. Lovely and Ms. Kagango said.
“It is one thing to have a high general government gross debt burden, but at least ours is pointed lower. If it was both high and rising, then we’d really be on tenterhooks.”
Mr. Lovely and Ms. Kagango also stressed that “we’re not necessarily expecting Fitch’s recent caution on the general government debt burden to translate into overt action on the government of Canada’s credit rating … unless (or until) the economy falters more significantly and/or federal-provincial deficits balloon out much more than expected.”
And, for that matter, both Moody’s and Standard & Poor’s, the other two big agencies, have suggested no looming changes in their ratings.
Canadians “might have a choice to make” at some point when it comes to politics.
“Were Canada’s economy to slow much more significantly than economists anticipate, staunching the flow of red ink needed to maintain the much ballyhooed triple-A sovereign rating might require cutting government spending and/or raising taxes relative to the status quo,” they said, noting that we’re talking about provinces, as well.
And it’s hard to win over voters with that stance.
“We’re trying to be neither cavalier nor alarmist here,” said Mr. Lovely and Ms. Kagagno.
“Should healthy, near-potential growth continue apace, then Canada’s general government gross debt burden should continue to recede, dulling the near-term ratings threat,” they added.
And, of course, Ottawa could partly blame the provinces if an agency ever to cut the rating.
“It’s here, in the broader provincial sector, where gross debt is heaviest and where fiscal capacity gaps remain, even if some jurisdictions deserve credit for getting/keeping their fiscal houses in order.”
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