Briefing highlights
- Why the loonie could tumble
- NAFTA talks resume today
- Markets at a glance
- Regulator puts brakes on Murdoch Sky deal
- Cara to swallow the Keg
- What else to watch for today
How the loonie could tumble
The math may vary, but there are scenarios that suggest the Canadian dollar could plunge to as low as 70 cents (U.S.) over the course of the year.
Driving these scenarios is the outlook for Bank of Canada interest rates and the fate of the North American free-trade agreement.
Where NAFTA is concerned, Canada, the U.S. and Mexico launch their sixth round of talks today in Montreal. That's not the 70-cent scenario, but the Canadian dollar could be jumpy, nonetheless.
"If the history of NAFTA tensions from 2017 are a guide, there is some heightened risk narrowly against MXN and CAD headed into this next round of negotiations [this] week, but any risk premium associated with NAFTA risks have quickly faded with the fading of news interest," said Daniel Hui of JPMorgan Chase, referring to the peso and the loonie by their symbols.
TD Securities, for one, believes the Canadian dollar "is set to remain the laggard" among G10 currencies, noting the loonie "still screens rich" based on its estimates.
Add to that TD's "negative bias toward CAD given the scope for NAFTA tape bombs," said Mark McCormick, North American head of foreign exchange strategy, referring to news headlines amid the negotiations.
"Media reports indicate tensions in the discussions, leaving the room for a slip-up high," he added. "Indeed, the risks that Trump invokes [NAFTA's six-month withdrawal notice article] as a negotiating tactic is high, and we believe that markets are not properly hedged for such an outcome."
Bipan Rai, North American head of macro strategy at CIBC World Markets, noted that the top Canadian, American and Mexican officials won't be at the talks until late this month.
"The right NAFTA trade is to be long EUR/CAD and short CAD/JPY if talks break down," he added, referring to the euro and the yen.
The U.S. dollar, itself, has been in trouble of late, but NAFTA's not the driving factor there, observers believe.
The NAFTA talks have also been troubled, and the round that begins Tuesday "will need to address and make progress on the several U.S. demands which caused the October near-breakdown," Mr. Hui said.
"The recent scenario suggested by unnamed Canadian officials of the U.S. notifying withdrawal at or around the coming round is not implausible, because (i) it only allows, but does not commit the U.S. to affect the withdrawal at the end of the six-month notification period; (ii) but it could improve the U.S. negotiation position by making a pullout threat more credible; and (iii) it would demonstrate a position that muddling through with the status quo is not a viable option."
Okay, here's the 70-cent scenario.
The Bank of Canada raised its benchmark overnight rate last week by one-quarter of a percentage point to 1.25 per cent. Some analysts believe that increase may have been the first of up to three this year, while others expect fewer, possibly just the one.
They also believe the central bank would roll back its increases, and possibly even cut further, should NAFTA die.
"We keep getting questions about how the possible (probable?) abrogation of NAFTA would affect the Canadian dollar," said David Rosenberg, chief economist at Gluskin Sheff + Associates, citing the central bank's comments on the trade talks and currency.
"Make no mistake, there will be an impact on the loonie, not positive either (ya think?), and it will happen through Canada/U.S. interest rate differentials," Mr. Rosenberg said, outlining his math, assuming no big moves in certain commodities, and citing what the Federal Reserve may do.
"If the Fed goes four times and the BoC is done, that takes the loonie to 73 cents," Mr. Rosenberg projected.
"If the BoC takes back Wednesday's hike and the Fed goes four times, then the Canadian dollar goes to 70 cents."
Morgan Stanley analysts see the loonie tumbling to just below 71.5 cents by early 2019, in the wake of last week's cautious hike and given what they expect the U.S. dollar to do, which is rally later this year.
Morgan Stanley economist Robert Rosener and strategists David Adams and Nicole Minkina expect the Bank of Canada to increase its key rate just once more this year, in April, and then grow more dovish.
Until then, they said, the loonie should go for between about 78.7 and 80.6 cents.
"With our economists expecting data to decelerate in the coming months, the BoC changing its tone, keeping in line with its data-dependent stance, should prompt investors to begin rethinking their expectations for future rate hikes, which should be reflected in a weaker CAD," they said.
"Global factors will be the key driver later this year, driving USDCAD to 1.40 by 1Q19."
You get to just shy of 71.5 cents by looking at it the other way around.
"We continue to emphasize that the dovish BoC will only be part of the story," the Morgan Stanley analysts said.
"The current environment of strong global growth, ample liquidity, and robust risk sentiment has been a tailwind to various economies, with Canada being no exception."
- Follow our Inside the Market
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- Robert Fife, Adrian Morrow: Brian Mulroney to tout benefits of NAFTA before U.S. Senate committee
- Editorial: When at the NAFTA table, avoid the Jell-O
Markets at a glance
Read more
What to watch for today
Along with NAFTA and the start of the the World Economic Forum gathering in Davos, AGF Management Ltd., Canadian National Railway Co., Johnson & Johnson, Procter & Gamble Co. and Verizon Communications Inc., among others, are expected to report quarterly results.
More news
- U.K. regulator puts brakes on Rupert Murdoch’s $15.7-billion Sky deal
- Cara Operations set to swallow upscale competitor the Keg