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Briefing highlights

  • Behind the Canadian dollar’s losses
  • Trump slams Canadian trade practices
  • Markets at a glance
  • U.S. probes Canadian welded pipe exports
  • Pepsi revenue tops estimates

Pain trade

The Canadian dollar is having a tough go of it.

Indeed, you'll notice it's now worth about 2 cents less than it was at the beginning of February, having suffered along with stocks amid the rout.

First, there's the pain trade, as Mark McCormick notes.

Then, as Douglas Porter puts it, there's the fact that "the loonie has never met a financial selloff it didn't want to join."

For foreign-exchange markets, the pain trade last week was the greenback's rapid rise amid the equity turmoil, and markets had to adjust quickly, though it settled down on Monday.

The pain trade now is the greenback gaining somewhat against the loonie and "other dollar-bloc currencies, said Mr. McCormick, North American head of foreign-exchange strategy at TD Securities, referring to the loonie by its symbol.

We're heading into a couple of key days for the currency markets, too, and some important readings, notably the latest on inflation. Inflation, remember, was the spark for the stocks selloff as markets speculated that strong wage gains in the last U.S. jobs report would drive the Federal Reserve to raise interest rates up to four times this year.

Economists expect Wednesday's report to show that costs at the gas pump helped drive consumer prices up by 0.3 or 0.4 per cent in January, with the annual inflation rate easing to 1.9 or 2 per cent, down from December's 2.1 per cent.

There's more going on for the Canadian currency, said Mr. Porter, Bank of Montreal's chief economist.

"As we have long suggested, the loonie has never met a financial selloff it didn't want to join; that is, it usually gets walloped alongside other 'risk' assets," he said, referring to last week's tumble.

There was the strong U.S. dollar, weaker oil prices and a sour monthly Canadian jobs report on Friday.

And "rumbling away in the background," Mr. Porter said, is the renegotiation of the North American free-trade agreement, and "the potential for an ultimate nasty blow on that front."

Friday's jobs report showed huge job losses in January, and a notch up in the unemployment rate, all of which feeds into speculation of what the Bank of Canada plans to do about interest rates, and, thus, into the currency mark.

The jobs report "is likely to pour cold water on the expectations that the BoC can (or even should) deliver nearly three more rate hikes in 2018," said TD's Mr. McCormick.

"The data set is too noisy to be taken at face value, but the downside surprise feeds into the narrative that data moment has likely peaked."

By that he meant that Statistics Canada's monthly labour reports can be volatile. And he noted that markets will now be watching for "any weakness" in economic indicators.

Which brings us to this week's American indicators.

"This week the loonie will be closely watching U.S. data, risk appetite and the broader trends in the [U.S.] dollar," Mr. McCormick said.

"Given that our measure of data surprises momentum is starting to top out and the market is now revising down its views on Canadian growth, we think the path of least resistance is higher for USD/CAD," he added, meaning the U.S. dollar versus the loonie.

For the record, BMO's Mr. Porter noted that the loonie isn't far off from where it began 2018.

"Despite [last] week's slew of hurdles, we remain quietly constructive on the Canadian dollar in the year ahead," Mr. Porter said.

"While we have had to make a current-level adjustment on the call, we have not changed our year-end target of roughly 83 cents (or $1.20/US$)," he added.

"First, the market turmoil will pass, presumably. Second, the pronounced weakness in Canada's oil prices, also a drag on the loonie, will likely become less of a drag as we move into the spring. And, finally, the U.S. dollar is expected to resume its broad softening, with a rapidly rising budget deficit providing some fresh concerns on the longer-term U.S. outlook."

At this point today, "the forex markets are working through a few daily themes, ranging from the risk meltdown to the Trump budget," Mr. McCormick said.

"The latter is a medium-term negative for the [U.S.] dollar, especially against the [euro] and [yen], but the rekindling of a 'reciprocal tax' should keep equity markets on high alert for renewed trade tensions," he added, referring to President Donald Trump's renewed threat to hit imports Monday.

Mr. Trump, having made such threats before, said "we're going to be doing very much a reciprocal tax and you'll be hearing about that during the week and the coming months."

He cited Canada and Mexico, the parties to the disputed NAFTA, China, Japan and South Korea, though one of his officials denied anything was being planned at this point.

Read more

Some investors are tetchy that we are not out of the woods yet

David Madden, CMC Markets

Markets at a glance

Read more

U.S. in new trade probe

The U.S. Commerce Department is going after Canada and a few other countries over exports of large diameter welded pipe, opening a new front in its trade spats.

Commerce Secretary Wilbur Ross unveiled a new probe today, saying the U.S. will investigate whether such imports from Canada, China, Greece, India, Korea and Turkey are being dumped and whether unfair subsidies are involved.

The action was sparked by complaints from several American companies, and Canada is not being probed for unfair subsidies, only for alleged dumping.

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