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If you don’t know about the January effect on the Canadian dollar, you should. Now
Michael Babad

This article was published more than 6 years ago. Some information may no longer be current.

Briefing highlights

  • The seeming January effect on the loonie
  • A key day for NAFTA talks in Montreal
  • Markets at a glance
  • Aphria to buy Nuuvera
  • Dr Pepper and Keurig to merge
  • Steady Fed expected this week
  • But will it spoil the market party over time?
  • What to watch for in Trump’s speech
  • What to expect on the economic front
  • What else to watch for this week

The January factor

If you don't know about the seeming January effect on the Canadian dollar, you should.

And given that we're heading into February, now's a good time. For investors, exporters, importers and snowbirds.

Looking at how several currencies behaved between 2000 and 2017, Royal Bank of Canada found that the Canadian, Australian and New Zealand dollars showed "consistent evidence of overshooting" in January.

"Of course, 18 years is a relatively small sample and the results could be spurious, but there are several intuitive reasons to think these currencies might be vulnerable to overcrowding," said Adam Cole, RBC chief currency strategist in London.

"Relative illiquidity is likely to be one factor," Mr. Cole said in his report.

He referred to the currencies by their symbols: CAD, AUD and NZD for the Canadian, Australian and New Zealand dollars, respectively, GBP for Britain's pound and EUR for the euro.

"Turnover in AUD – the most liquid of the three – is around half of that in GBP and a fifth of that in EUR," Mr. Cole said.

"And AUD is three times more liquid than NZD," he added.

"The perceived high beta that all three have to the global and local economic cycles may be another factor – any one would be a good candidate to express a cyclical view for the year ahead. Whatever the reason, the consistency with which January moves are reversed (particularly for AUD, NZD and CAD together … ) makes it hard to ignore."

This year is starting with decent gains in the three currencies. Just like last year, which "turned out to be another case of January overshooting and sharp corrections followed," Mr. Cole said.

"We find quite compelling evidence that these three currencies are prone to this phenomenon, in both directions, as crowded consensus trades unwind."

Thus, shorting the three "would be an optimal strategy for an investor looking for a near-term pullback in [the U.S. dollar's] protracted losses in 2018," Mr. Cole added.

"Investors with a core positive view on the commodity currencies should consider locking in some profits near-term, given the risk of a correction lower."

Recently, of course, the U.S. dollar has been on the ropes, and was bounced around last week by comments from President Donald Trump and Treasury Secretary Steven Mnuchin.

U.S. Treasury Secretary Steven Mnuchin walks through the snow during the annual meeting of the World Economic Forum in Davos, Switzerland, Wednesday, Jan. 24, 2018

Other observers, by the way, expect the Canadian dollar to sink. And there are many uncertainties, from rising oil prices to moves by the Bank of Canada and Federal Reserve, and, particularly this week, the state of negotiations to remake the North American free-trade agreement.

"As markets refocus on actions rather than words, it will be the relative inaction of the BoC (compared to current market expectations and the Fed) that will see the Canadian dollar fall back below the 80-cent mark," said Andrew Grantham of CIBC World Markets.

NAFTA talks, the sixth round of which are wrapping up in Montreal, are key today as top officials from Canada, the U.S. and Mexico take part.

Daniel Hui of JPMorgan Chase noted the "cautiously optimistic" tone so far in this current set of talks, the fifth round having ended on a sour note. Of course, Mr. Trump has threatened to kill NAFTA if he doesn't get a fair deal, and global trade tensions are expected to mount as the U.S. administration chases its America First policy.

"For now, all this implies trade tension risks will continue to be an ongoing source of discount pressure on the USD versus other reserve assets, while the degree to which high-beta, trade-sensitive trade partners of the U.S. (CAD, MXN, Asian countries) need to price in more trade disruption risk premium will depend on how aggressive and broadly forthcoming trade enforcement actions will be," Mr. Hui said, referring to Mexico by its currency symbol and the U.S. dollar by its symbol.

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Markets at a glance

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Aphria strikes Nuuvera deal

Canada's young marijuana industry has a serious case of the munchies.

Amid a series of takeovers, Aphria Inc. struck an agreement to swallow Nuuvera Inc. in a deal the companies say values the latter at about $826-million.

They also said in a statement today that the deal will create the "global leader in the international medical cannabis market, as Aphria adds Nuuvera's presence in Europe, Africa and the Middle East to its own, which include Australia.

Aphria is offering $8.50 in cash and stock, and will issue up to about 34 million shares for the deal.

I don't want to spoil the party so I'll wait: The week ahead

If they were singing about monetary policy rather than being jilted, the Beatles might belt it out like this: I don't want to spoil the party so I'll wait.

They'd be singing about the stock market and whether, as Capital Economics wonders, the fun ends when the Federal Reserve takes the punchbowl away.

The Federal Open Market Committee, the U.S. central bank's policy-setting panel, is expected to wait until March to raise interest rates again, and thus do nothing when it releases its decision Wednesday afternoon.

"With markets already pricing a March rate hike as certain, and incoming data largely in line with the FOMC's December outlook, we can hit the snooze button into the March meeting," Morgan Stanley said in a lookahead to the decision.

"We expect no change in policy at the Jan. 30-31 meeting, and very little change to the statement."

When it does raise its key rate again, it will do so for economic, rather than market, reasons. But what might that all mean for the stocks rally?

"The party in the markets has remained in full swing while the Fed has emptied its punchbowl slowly," Capital Economics said in a report.

"This year, though, the U.S. central bank is likely to drain it more quickly," it added.

"And in some other major economies, monetary policy is also likely to be tightened further, or at least become less expansionary. Admittedly, the music may not stop until the second half of 2018, when significantly higher interest rates start to weigh on the U.S. economy just as fiscal stimulus is fading. But once growth in the U.S. starts to slow, risky assets there are likely to come under pressure. That would probably be contagious, even if growth remains healthy elsewhere."

As for being jilted, Janet Yellen was. By Mr. Trump, who dumped her before what would have been a second date at the Fed.

This will be Ms. Yellen's last meeting as chair before Jerome Powell, the president's choice, takes over the post.

Federal Reserve chair Janet Yellen

There are other changes, too.

"The voting members in the FOMC take on a more hawkish hue this year, given the annual rotation of regional presidents and with dovish-leaning Janet Yellen departing," said Bank of Montreal deputy chief economist Michael Gregory.

"In turn, we judge the Fed is now more likely to react to rising (net) inflation risks, let alone to the realization of higher inflation readings."

Here's the rest of the calendar: (Apologies for mixing up the Lennon-McCartney lyrics, but it wouldn't work otherwise.)

Monday: Though tonight she's made me sad, I still love her

Let's see how Canadian stocks open the week, given how S&P/TSX composite investors have been jilted, too.

"Canada now stands out as the lone major-market index flat on a year-to-date basis and, while Canadian investors are hardly losing their shirts (up more than 3 per cent in the past year before dividends), the Nasdaq is up a cool 31 per cent (and still 23 per cent if left unhedged to the loonie)," said BMO senior economist Robert Kavcic.

"Over a five-year period, the TSX has posted 5.5-per-cent annualized growth, versus nearly 14 per cent in the S&P 500," he added.

"In a nutshell, if Canadian investors still don't have meaningful U.S. exposure, they're passing up some of the headiest equity market returns in a generation in exchange for those that look decidedly normal."

It's also a crucial day for NAFTA talks.

"The Montreal round of NAFTA negotiations is set to conclude on Monday with the principal negotiators releasing a joint statement," Deutsche Bank said in a report.

"While the president's comments on NAFTA last week were somewhat optimistic, Trump's Davos speech last Friday gave some hints about particular priorities around trade negotiations, notably intellectual property theft," the bank added.

"The State of the Union [on Tuesday] presents Trump with another high profile platform that could influence the tone of future trade discussions, especially given his recent actions on solar panel and washing machine tariffs."

Today also brings some economic numbers from Japan, and Lockheed Martin Corp. results, among others.

Tuesday: I wonder what went wrong, I've waited far too long

We'll get a look at the final quarter of last year for Europe's economies, which are recovering from a far-too-long slump. Previous readings have been revised higher, and RBC, for example, has raised its estimate of fourth-quarter growth to 0.7 per cent.

"That, along with the aforementioned GDP revisions, would leave full-year 2017 GDP growth at 2.5 per cent year over year, the fastest full-year growth rate enjoyed by the euro area economy since 2007," RBC said.

Then there's Mr. Trump, whose State of the Union address tonight will be his first. And, despite what he's going to say, many in America believe it's a fractious union after a year of divisive policies and comments.

"The themes of the speech are likely to reflect those emphasized throughout his first year in office, with special emphasis on America First principles highlighted at the recent Davos, Switzerland, World Economic Forum," said Citigroup economist Dana M. Peterson.

U.S. President Donald Trump attends the World Economic Forum annual meeting in Davos, Switzerland Jan. 26, 2018

The President can boast of a tax overhaul and his fight against what he sees as trade abuses, Ms. Peterson said, with goals including infrastructure spending, border security, immigration reform, more deregulation, and keeping up the trade fight.

Markets will also get the latest on U.S. home prices, with economists expecting to see a rise of 0.7 per in November from October, and 6.4 per cent from a year earlier.

Among the earnings reports: Aetna Inc., Corning Inc., McDonald's Corp., Metro Inc. and Pfizer Inc.

Wednesday: I would hate my disappointment to show

Boeing Co.'s quarterly results should be interesting, given what it says was Friday's disappointing loss on its trade complaint against Bombardier Inc. at the U.S. International Trade Commission.

Besides Boeing, it's a pretty big day on the earnings front: AT&T Inc., CGI Group Inc., Eli Lilly and Co., Facebook Inc., Methanex Corp., Microsoft Corp.. Nasdaq Inc., United States Steel Corp. and Xerox Corp., to name a handful.

On the economic front, expect to see a bounce in Canada's economy when Statistics Canada reports its look at gross domestic product in November.

"It's going to be a great month for Canadian output, with November readings already in hand pointing to an advance on the order of 0.4 per cent," said Nick Exarhos of CIBC.

"The Bank [of Canada] hiked earlier this month, and released a new set of forecasts for the economy," he added.

"It didn't, however, lower its Q4 estimate, which still stands at 2.5 per cent. Even with a strong November, growth is likely to undershoot that modestly at 2 per cent, removing some of the perceived impetus for another hike in the near term, which markets continue to place decent odds on."

Thursday: If I find her I'll be glad. I still love her

Morgan Stanley certainly does, when it comes to Amazon.com Inc.

But you don't really don't want to leave before today's earnings party, anyway, given some biggies including Amazon, Apple Inc. and Google parent Alphabet Inc.

Consider that Morgan Stanley analysts just raised their price target on Amazon stock to $1,400 (U.S.) and their bull case to $2,100, with a bear scenario at $1,000.

There's more today, including manufacturing purchasing managers index readings around the world. Markets will, of course, watch the U.S. ISM measure closely.

"The ISM manufacturing index has been trending at its highest levels since 2011, and that strength is unlikely to fade much early in the new year," CIBC's Royce Mendes said of the January report.

"Regional indicators are suggesting a slight giveback, but a modest decline from 59.7 to 58.7 won't do much to alter the positive narrative surrounding the industry."

The 50-mark separates contraction from expansion.

And more earnings: Alibaba Group Holdings Ltd., ConocoPhillips, DowDuPont Inc., Hershey Co., Mastercard Inc., Royal Dutch Shell, Saputo Inc., Time Warner Inc., United Parcel Service Inc. and Visa Inc.

Friday: I've had a drink or two and I don't care

Why not? Americans can afford it as wages rise.

Economists expect the widely watched monthly U.S. employment report to show January job gains of between about 185,000 and more than 200,000, with unemployment holding at 4.1 per cent.

"But the focus is more on wages this month, and markets will eye an upside surprise on the back of announcements of wage hikes and bonus increases by firms after the tax reform passage and the scheduled minimum wage hikes in 18 states and 20 cities," Toronto-Dominion Bank economists said in their lookahead.

While they expect to see average hourly earnings growth of 0.2 per cent from December, and a steady 2.5 per cent from a year earlier, others believe the report could show 0.3 per cent and 2.6 or even 2.7 per cent, respectively.

And, finally, some earnings: Chevron Corp., Exxon Mobil Corp., Imperial Oil Ltd., Merck & Co. and Weyerhaeuser Co.

(It now being almost the weekend, go take a walk and look for her.)

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