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Briefing highlights

  • Loonie slips on Bank of Canada statement
  • Currency dips below 77 cents, rebounds
  • Central bank warns on trade
  • Markets at a glance
  • CN apologizes, pledges action
  • Canada’s trade deficit narrows
  • U.S. trade gap at nine-year high

Loonie slips

The Canadian dollar tumbled after the Bank of Canada's trade warnings today before rebounding later, and everything playing out suggests we're in for a spell of "broad weakness in the loonie."

The currency traded as low as 76.9 US cents and as high as 77.7 US cents today, sitting just above the 77.5-cent mark by late afternoon.

As The Globe and Mail's Barrie McKenna reports, Bank of Canada governor Stephen Poloz, senior deputy governor Carolyn Wilkins and their colleagues held their benchmark overnight rate steady at 1.25 per cent.

But they warned in their statement that "trade policy developments are an important and growing source of uncertainty for the global and Canadian outlooks."

And in a key line, they said they would "remain cautious in considering future policy adjustments, guided by incoming data in assessing the economy's sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth an inflation."

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.

It's the word cautious that's key there.

In its trade concerns, the central bank didn't mention the source of its angst, but it's obvious given the U.S. administration's protectionist agenda, with President Donald's Trump latest threat to hit steel and aluminum imports with tariffs, and the ongoing negotiations to overhaul the North American free-trade agreement.

It's also monitoring the impact of new mortgage rules and other measures on the economy and consumers, having already raised its key rate once this year.

The loonie had already been suffering because of developments in Washington, where Gary Cohn resigned as Mr. Trump's key economic adviser after failing to dissuade him from the tariffs of 25 per cent on steel and 10 per cent on aluminum.

"The tone of the statement was largely as expected with the bank leaning on the dovish side," said Mark McCormick, North American head of foreign exchange strategy at TD Securities.

"It sees growing risks of uncertainty on the external side and downplayed the pickup in wage growth," he added.

"On the latter they downplayed down both inflation and wages, underscoring that they think both measures should be higher. That reflects the evidence of some residual labour market slack and temporary factors on headline inflation. The pass-through of higher rates to housing is also a lingering headwind."

Everything combined "should reinforce broad weakness in the loonie," Mr. McCormick added.

The loonie is now down by 4 per cent on a trade-weighted basis since the beginning of last month, and by more than 5 per cent against the U.S. dollar alone, noted Bipan Rai, executive director of foreign exchange strategy at CIBC World Markets.

Here's his outlook:

"If USD/CAD cannot gain traction above the 1.30 mark in the next few sessions, we expect some profit-taking on short-term positions that have performed well over the past month," Mr. Rai said.

By that he means the U.S. versus the Canadian dollar, and a loonie just below 77 US cents.

"If USD/CAD does close above 1.30 in the next few sessions, espect the 1.3173/5 area to be at risk," Mr. Rai added, the latter numbers meaning a loonie just below 76 US cents.

The outlook on Bank of Canada rate hikes is far from certain, and that's something that will affect the loonie.

Some economists expect one more increase this year, others two and still others three.

"All in all, we expect the BoC to remain on the sidelines for another couple of months, by which time there may be more clarity on trade, something that may allow the central bank to raise interest rates two more times later in the year," National Bank economists Krishen Rangasamy and Paul-André Pinsonnault said in a research note.

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Markets at a glance

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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.

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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.

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