By MICHAEL BABAD
Monday, March 19, 2018
THE WEEK AHEAD
This could be a telling week for the wounded Canadian dollar.
At play are two central banks amid an already dim market view of the loonie. And, of course, whatever alternative trade facts U.S. President Donald Trump happens to spout because, by his own admission, he doesn't know if they're even real.
The loonie sits at a depressed level of about 76.5 US cents, weighed down by a few factors, notably the diverging paths of the Bank of Canada and the Federal Reserve.
Both central banks are on show this week, the Fed on Wednesday and the Bank of Canada one day later, which could set the path for the loonie.
The U.S. central bank is widely expected to raise its benchmark federal funds rate by one-quarter of a percentage point - to a target range of 1.5 per cent to 1.75 per cent - in what would be the sixth increase since late 2015.
Markets will watch for how aggressive the Fed could be after that, specifically whether the views of individual central bank officials, released at the same time, point to three more rate hikes this year, or just two.
Then on Thursday, the Bank of Canada's senior deputy governor, Carolyn Wilkins, takes the stage with an afternoon speech at the Rotman School of Management in Toronto.
Ms. Wilkins, Governor Stephen Poloz and their colleagues have already sounded a cautious note after one rate increase this year, as a slowing economy, trade relations with the United States and heavily indebted consumers cloud the outlook.
Analysts have, thus, scaled back their view of how aggressive the Bank of Canada will be this year, and markets should expect Ms. Wilkins to "echo the Governor's cautious tone," CIBC World Markets economist Royce Mendes said.
The Bank of Canada's key overnight rate now stands at 1.25 per cent.
Stronger expectations from the Fed and weaker ones from the Bank of Canada - hawkish against dovish - are less friendly for the Canadian dollar against the U.S. currency.
And much of this is already priced into the market. That's why the loonie is worth just a bit more than three-quarters of a U.S. dollar.
JPMorgan Chase, for example, just cut its forecast for the loonie "on BoC dovishness and trade tensions," currency strategist Meera Chandan said.
The JPMorgan analyst now sees the currency at about 76.3 US cents by mid-year, down from an earlier projection of just more than 82.5 US cents, and at about 80.5 US cents, compared with 84 US cents, by the end of 2018.
Then there are those irritating trade issues - as in, they've been irritating the loonie - which come as Canada, the United States and Mexico renegotiate the North American free-trade agreement.
Then there's the freewheeling Mr. Trump, who boasted last week that he made up trade facts in a meeting with Prime Minister Justin Trudeau.
"The bizarre and somewhat unseemly spectacle of the U.S. and Canada debating over who has a trade deficit with whom simply further fuelled the negative sentiment [surrounding the loonie], which already had a plentiful supply of existing economic fuel stock," Bank of Montreal chief economist Douglas Porter said in a report. "(For the record, there are more bilateral measures of trade than you can count on one hand, so while figures don't lie, liars can run riot.
We would assert that the big picture is that trade is very well balanced overall between the two countries, given the massive size of the back and forth flows.)"
MONDAY: "TRADE WARS ARE BAD"
Group of 20 finance ministers and central bankers kick off a two-day meeting in Buenos Aires, discussing a wide range of issues that could include cryptocurrencies and trade, the latter coming as the U.S. administration amps up its protectionist agenda.
Don't expect much, though, because, as CMC Markets chief analyst Michael Hewson put it, he's not "really sure what else they can add, apart from a bland statement that trade wars are bad."
TUESDAY: ON TIME
There are a handful of quarterly corporate reports from the likes of Alimentation Couche-Tard Inc., Westshore Terminals Investment Corp. and FedEx Corp.
FedEx earnings for the third quarter "are likely to be affected by the recent U.S. tax changes, with some estimates suggesting that the cumulative effect of the changes could amount to a US$1billion boost to annual profits," CMC's Mr. Hewson said. "As far as its U.S. operations are concerned, the slowdown in retail sales towards the end of last year and beginning of this year might temper its numbers."
WEDNESDAY: HAPPY ANNIVERSARY
A couple of interesting tidbits for today's Fed decision: This will be Jerome Powell's first outing as chairman of the central bank, and it coincides with a key anniversary this year.
"Importantly, this will mark the 10-year anniversary of both the collapse of Bear Stearns and the last time the Fed's key policy rate was above the core PCE inflation rate," said Michael Gregory, BMO's deputy chief economist, referring to a measure of personal consumption expenditure prices that strips out volatile energy and food costs.
Watch Brazil, too, where trouble is compounded, and where Capital Economics expects the central bank to cut its key rate by one-quarter of a percentage point to 6.5 per cent.
THURSDAY: SNAP, CRACKLE AND POP
The Bank of England follows the Fed with a rate decision that will be watched for what comes next.
"The Bank of England is expected to keep rates unchanged, however central bank thinking about the U.K. economy against the current Brexit backdrop could give important clues about the prospects for a May rate rise," Mr. Hewson said.
Watch, too, for Dropbox's initial public offering, which would value the company at about US$7-billion, Mr. Hewson noted.
"The company plans to sell 36 million shares between US$16 and US$18 a share, and is hoping that it doesn't suffer from the same post-IPO hangovers as previous hyped-up technology stock launches have seen recently, Snap being a case in point," he added.
FRIDAY: GAS PAINS, IN MORE WAYS THAN ONE
You get to see how much more you're paying for stuff when Statistics Canada releases its morning report on February inflation.
Economists expect to see a hefty 0.5-per-cent jump in consumer prices, and an annual inflation rate of between 1.9 per cent and 2.1 per cent, up from January's 1.7 per cent.
"In part, that's because energy prices were up almost 5 per cent from a year ago by our calculation, compared to 2.4 per cent in January," Royal Bank of Canada economists, who forecast annual inflation at 1.9 per cent, said in a lookahead.
"Food price growth has also been drifting higher, though," they added. "We expect yearover-year food price growth inched up to 2.5 per cent in February from 2.3 per cent in January and marking a sharp reversal from the 2.3-per-cent year-overyear decline posted in February a year ago. We also assume there will be more signs of firming in underlying price growth beyond energy and food price volatility."
Along with how much more we're paying, we get to see how much more we're spending.
Economists forecast Statscan will report that retail sales rose by 1 per cent or more in January.
Russia's central bank also meets, and Capital Economics expects a cut in the benchmark rate of at least one-quarter of a percentage point, to 7.25 per cent.
Bank of Canada senior deputy governor Carolyn Wilkins, left, in Ottawa in 2016, will deliver a speech at the Rotman School of Management on Thursday that could help set the path ahead for the loonie.