Briefing highlights
- Canadian dollar scenarios
- Barrick swallow Randgold in huge deal
- Meet Barrick’s new CEO
- Markets at a glance
- Sobeys parent buys Farm Boy
- SiriusXM in deal for Pandora
- What to expect from the Fed this week
- What to watch for from Poloz
- What else is on tap this week
JPMorgan Chase has three NAFTA scenarios for the Canadian dollar and Bank of Canada as another supposed deadline looms.
There have been several deadlines in talks to overhaul the North American free-trade agreement, the latest being Sept. 30. And while economists still expect Canada to sign on to a deal struck separately between the United States and Mexico, negotiators are taking a break.
(Sort of like a rocky marriage: “No, we’re not divorcing, we’re just on a break.”)
Global foreign exchange strategist Daniel Hui and his JPMorgan colleagues, Patrick Locke and Ladislav Jankovic, looked at potential outcomes for how the loonie could move, taking into account how the Bank of Canada could react and whether the Trump administration carried through on threats to hit Canadian auto exports with crippling tariffs.
One: A "NewFTA," a signed and ratified deal.
Two: A “NoFTA,” a collapse that would see the United States withdraw from the pact.
Three: “Uncertain muddle-through,” either eventual success or a “Zombie NAFTA,” the latter meaning no deal, but U.S. President Donald Trump being in a position where he won’t or can’t kill the existing pact.
"Considering just the boundary cases, the current USD/CAD spot rate of 1.29 implies markets are placing a 70-per-cent probability of a successful NewFTA over a complete NoFTA collapse," Mr. Hui, Mr. Locke and Mr. Jankovic said in their report.
They were referring to the U.S. and Canadian dollars by their symbols and, at 1.29, a loonie valued at 77.5 US cents.
While there can and will be be twists and turns, of course, here are their scenarios:
‘PEACE DIVIDEND'’: 81¢
This is that 70-per-cent probability among investors.
"These odds have historically oscillated between 62 to 92 per cent from the beginning of negotiations, reflecting a general consensus that it is in none of the stakeholders’ interests to let NAFTA collapse. More recently since March, when U.S. policy has turned more aggressive, those odds have moved to a 59- to 73-per-cent range."
The reaction?
"The best-case NewFTA would justify USD/CAD at 1.24, as pent-up deferred investment drives a repricing of monetary policy to catch up with the Fed, and short CAD hedges are unwound."
Which would mean a loonie at just more than 80.5 US cents as markets speculate that the Bank of Canada would move to match the rate-hiking cycle of the Federal Reserve, making the currency more attractive.
"This would essentially remove the trade disruption uncertainty hanging over Canada since Trump’s election, and would be largely a return to an earlier NAFTA-status-quo trajectory," Mr. Hui, Mr. Locke and Mr. Jankovic said.
"BoC has been flagging a likely deferment of investment because of NAFTA uncertainty, so expectations of a cyclical 'peace dividend' might be realized."
‘INTERMINABLE UNCERTAINTY’: 76¢
"Without final resolution, either in a positive signing and ratification of a new trilateral trade agreement or negative with an executed U.S. NAFTA pullout, we will remain in the uncertain limbo we have been in for the past year. This has been an oscillation between uncertain hope that the process of negotiation will lead things to ultimate agreement, and fear that failure plus impatience by Trump will trigger a dissolution of NAFTA."
Missing deadline after deadline, while sounding hopeful, has helped fuel a "sense of interminable uncertainty" that threatens to look like an Energizer Bunny running out of juice but refusing to die just yet.
“This will continue to drag on realized Canadian investment and weigh on BoC’s assessment of risks, yet does not justify overwhelming bearishness, since unresolved status quo remains a favourable scenario than a disorderly NAFTA collapse,” said Mr. Hui, Mr. Locke and Mr. Jankovic.
"This also describes the 'Zombie NAFTA' scenario, where the three parties fail to deliver NewFTA, yet Trump is either unwilling or otherwise prevented from truly withdrawing and disengaging NAFTA by a U.S. Congress who exercises powers and prevents dissolution of U.S. NAFTA implementation laws."
Several observers have flagged the likelihood of a post-midterms Congress that could tie the Trump administration in knots.
The reaction?
“This translates to a current USD/CAD range mid of 1.31, which implies a 59-per-cent NewFTA probability over NoFTA,” that 1.31 translating to just above 76 US cents.
‘ACRIMONIOUS FAILURE’: 70¢
This is when the Energizer Bunny gives up the ghost.
Markets would price in the Bank of Canada cutting its benchmark overnight rate by half a percentage point, as it did during the oil price shock.
"The worst-case NAFTA scenario is one where Canada is exited from a North American trade regime through a completed U.S. withdrawal, whether replaced by a [U.S.-Mexico] bilateral agreement excluding Canada, or not at all, requiring Canada to fall back to the default [World Trade Organization] tariff regime," Mr. Hui, Mr. Locke and Mr. Jankovic said.
"Moreover, as this represents an acrimonious failure to agree with the U.S., this scenario also assumes that the Trump administration follows through with 25-per-cent tariffs on autos, as well as similar tariffs on other industries of contention (dairy, lumber)," they added.
“This is negatively impactful less due to the rise in customs duty rates (whose rise to WTO rates would be modest, excluding sectors targeted with more punitive U.S. tariffs), but because of supply chain disruptions from regulatory uncertainty and the reintroduction of cross-border friction hitherto eliminated by NAFTA. Some degree of supply-chain fragmentation and diversion would be likely, and businesses would need to reassess and adjust, further deferring investment plans.”
Besides a Bank of Canada rate cut, which would make the loonie that much less of a buy, the JPMorgan strategists built in a 10-per-cent drop in oil prices "between potential pricing in of broader trade war risks as well as potential distribution disruption of Canadian oil, which would exacerbate existing bottleneck problems."
Not only can the Canadian dollar move on interest rate speculation, but also on shifts in crude prices because of the country's reliance on the oil patch.
Built into this scenario, too, are big changes in hedging and the impact of uncertainty.
The reaction?
“USD/CAD in this scenario would be 1.43,” Mr. Hui, Mr. Locke and Mr. Jankovic said, meaning the loonie at just shy of 70 US cents.
"But the risks of a substantial overshoot above 1.43 are much less bounded, given the 'unknown unknowns' inherent in such an unprecedented change in the status quo."
And by “overshoot above” here, they mean an even lower loonie.
(Just as an aside here, Foreign Affairs Minister Chrystia Freeland, Canada’s chief negotiator, noted Thursday that “I am paid in Canadian dollars.” Too bad, that, under Scenario Three.)
Some observers, Bank of Montreal chief economist Douglas Porter among them, believe a post-deal rally wouldn’t last long, regardless.
Canada’s trade struggles pre-date NAFTA concerns, and will not be fixed by a deal, nor by a weaker currency alone," Mr. Porter said.
“The competitive challenges cloud the longer-term outlook for the Canadian dollar; while the currency would benefit temporarily from the relief of a new trade deal with the U.S., we suspect the glow would fade relatively quickly.”
Read more
- Canadian dollar forecasts that aren’t for the squeamish
- Adrian Morrow, Steve Chase, Eric Atkins: Canada, U.S. NAFTA talks on pause after two ‘tough’ days
- John Ibbitson: A bad NAFTA deal? Canada should take it and run
- NAFTA’s saga so far: A guide to trade, the talks and Trump
Barrick, Randgold in merger
Canada’s Barrick Gold is swallowing African operator Randgold Resources in a US$18.3-billion deal that will ensure its status as the world’s biggest gold company, and bring in a chief executive officer for the first time since 2014.
As The Globe and Mail’s Eric Reguly and Niall McGee report, the all-share, no premium deal seems designed to overcome Barrick’s problems in Africa, where it controls mines through its 64 per cent ownership of Acacia (formerly African Barrick), and perceived weakness among its senior management ranks. Barrick has no CEO and lost its president, Kelvin Dushnisky, last month.
The deal marks the first big expansion move by Barrick executive chairman John Thornton after four years of shrinking the company through mine sales, mine closures and the recruitment of Chinese partners at some of its operations.
Mark Bristow, the well-regarded CEO of Randgold will become chief of the enlarged company, which will retain the Barrick name.
Read more
- Eric Reguly, Niall McGee: Barrick Gold, Randgold Resources create mining giant with $18.3-billion deal
- Geoffrey York: Barrick’s new CEO Mark Bristow is a blunt-spoken, motorcycle-riding, Africa expert
- Eric Reguly: Barrick Gold’s John Thornton won’t back down
Markets at a glance
Read more
Empire buys Farm Boy
The parent company of Sobeys Inc. has agreed to acquire Ontario grocery chain Farm Boy in an $800-million deal that aims to beef up its business in fast-growing cities and suburbs, The Globe and Mail’s Marina Strauss reports.
It marks the first sizable acquisition by Empire Co. Ltd., based in Stellarton, N.S., since its $5.8-billion takeover of Safeway Canada in 2013.
It will keep the operations and management team of Ottawa-based Farm Boy intact, holding on to its popular private labels and focus on fresh and prepared foods, which are fast-growing and potentially high-margin categories compared to other parts of the grocery sector.
Read more
What to watch for this week
It’s all about central bank body language.
Or, to be perfectly accurate in the case of the Federal Reserve, dot language.
The U.S. central bank is widely expected to raise its benchmark rate by another quarter of a percentage point Wednesday.
But given that that's a given, what markets will be watching for is the so-called dot plot, which outlines where individual members of the policy-setting federal open market committee expect interest rates to go, and when. Investors will also be studying fresh economic projections.
"[This] week’s decision looks like a done deal, but the Fed’s economic forecast will still be closely watched," noted Toronto-Dominion Bank senior economist Leslie Preston.
"Now that another tranche of tariffs on Chinese imports and China’s retaliatory measures are on the books, it will be interesting to see how FOMC members adjust their outlook, if at all."
Wednesday's decision could also mark something of a post-crisis milestone if, as expected, the central raises its target range for the Fed funds rate.
“This will lift the target range for the Fed funds rate to 2 per cent to 2.25 per cent, and the midpoint (2.125 per cent) unequivocally above core [personal consumption expenditure] inflation (currently 2 per cent year over year) for the first time since March, 2008,” said Bank of Montreal deputy chief economist Michael Gregory.
"This marks a critical juncture in the Fed’s policy normalization process," he added.
"Up to this point, the objective has been to shift policy rates from zero nominal to zero real; now, it is to shift them from zero real to neutral real - an objective shrouded with ambiguity because the level of the longer-run neutral real policy rate and the optimal path to get there are uncertain."
Markets will also be looking for clues from Bank of Canada governor Stephen Poloz, who gives a speech in Moncton, N.B., Thursday.
He's scheduled to speak about disruptive technologies, but investors will watch for signals, nonetheless, given that observers expect the Canadian central bank to lift its benchmark again at next month's meeting, particularly after Friday's above-target, if easing, reading of inflation.
Bank of Canada governor Stephen PolozChris Wattie/Reuters
"We will be attentive for any comments regarding the BoC’s assessment of inflation after the release of August [inflation]," Veronica Clark and Dana M. Peterson of Citigroup said in a lookahead.
Read more
WHAT ELSE TO WATCH FOR THIS WEEK
And so the quiet and sneaky bull market marches on
— Robert Kavcic, Bank of Montreal
MONDAY
Japanese and Chinese markets are closed, but we'll see if U.S. stocks can continue their record-winning ways by the time they close.
"Equity markets rallied [last] week, flying in the face of an escalating trade war between the U.S. and China, while there was little progress on the NAFTA file," said BMO senior economist Robert Kavcic, noting the S&P 500's 0.8-per-cent climb to a record and the S&P/TSX Composite Index gaining 1.3 per cent amid a pot stock frenzy.
"And so the quiet and sneaky bull market marches on."
Read more
TUESDAY
Economists expect the S&P Case-Shiller home price index to show U.S. prices dipped 0.2 per cent in July from June, but rose 6.2 per cent from a year earlier.
It's a big day for Nike Inc., too, as it reports quarterly results for the first time after its spotlight deal with Colin Kaepernick.
"The recent controversy around Colin Kaepernick raised its profile in the wider media, however it is unlikely to affect its numbers that much," said CMC Markets chief analyst Michael Hewson.
"What might is the recent escalation in the trade rhetoric between the U.S. and China, particularly if tariffs get applied to goods that the company sells in one of its biggest markets in the coming months."
Read more
WEDNESDAY
You can basically sleep through the morning while you wait for the Fed's afternoon decision and projections, and a news conference with chair Jerome Powell.
Federal Reserve chairman Jerome PowellMary Calvert/Reuters
THURSDAY
You can basically sleep through the morning and the afternoon because Mr. Poloz doesn't speak until the evening.
Unless you're required to monitor interest rates in faraway places: Capital Economics expects the Philippines central bank, Bank Indonesia and the Central Bank of Egypt to raise key rates.
FRIDAY
Some economists expect Statistics Canada to report that the economy expanded by a slim 0.1 per cent in July, kicking off the third quarter on a downbeat note after flatlining in June.
But don’t read too much into that.
“The July weakness is expected to largely reflect transitory production disruptions at the Syncrude oil sands operation in the month due to a power outage,” Royal Bank of Canada economists said in a lookahead.
"Oil sands activity is expected to start to recover in August, which will keep Q3 GDP growth positive, though with the July weakness contributing to a slowing to 1.6 per cent [annualized] relative to the 2.9 per cent recorded in Q2," they added.
“The recovery in oil sands production will contribute to Q4 GDP growth rebounding to a projected 2.6 per cent.”
Michael Babad