Talking Points
December 04, 2020 | 13:13
Ten Loons a-Leaping
Economics
Economics
Yet another week of broad financial market strength swept up the Canadian dollar to its highest level in almost three years. The currency rose 1.5% on the week by mid-Friday to above 78 cents (US), or just under $1.28/US$. That leaves it up by more than 13% since the depths of the market turmoil in March, but up by a more sedate 1.5% since the start of the year. Of course, the loonie was hardly the only currency charging higher against a listing U.S. dollar, as the euro, for one, was also up 1.5% on the week, while the Korean won rose nearly 2%. And currencies were hardly the only market on the move, with global stocks hitting fresh highs, oil rising above $46, and even recalcitrant bonds getting into the act. The 10-year Treasury was probing the key 1% level by week’s end, up 13 bps in a week, even with a so-so (at best) U.S. jobs report for November. |
But turning back to our favourite currency—well, at least the favourite in Canada—let’s dig deeper into some of the major factors behind the swell of strength: Jobs Jolt: A proximate source of support for the loonie was the relative performance of employment in this week’s key reports for November. Canada managed to add a hearty 62,100 jobs last month, well above consensus and enough to clip the jobless rate 4 ticks to 8.5%. More impressively, hours worked jumped 1.2%, building in a massive 14% annualized rise for Q4. Yes, these figures pre-date the latest restrictions in some key regions (notably Toronto), but included closures in Manitoba and Quebec. Meantime, the U.S. jobs report was a bit of a damp squib, with payrolls undershooting expectations at +245,000 (and the household report slipping a tad), while the unemployment rate dipped 2 ticks to 6.7%. Bigger picture, Canadian employment is now down precisely 3% from pre-pandemic levels, while U.S. jobs are down much more since February (6.5% for payrolls, and 5.7% on the household survey). Big Dollar Drop: As we oft point out, the single biggest driver over time for the Canadian dollar is the U.S. dollar itself. And the direction for the latter has been pretty much due south since March, with the trade-weighted metric down 10% from those tumultuous days. Even from a year ago, the USD is now down roughly 6% versus advanced economy currencies. The Canadian dollar’s 3% y/y rise against the greenback is thus a bit lighter than average. Note that even with the U.S. dollar’s descent, it’s essentially just back in line with its 30-year average. Risk Rallies On: The pullback in the U.S. dollar is part of a larger market move back into so-called risk assets, including equities, commodities and credit. The loonie has been closely tracking equities throughout the turmoil of 2020 (i.e., more closely than usual). The correlation coefficient between the MSCI World Index and the Canadian dollar has risen to a lofty 0.95 in the past year. So, it’s no surprise that with the former hitting record highs this week and up 13% y/y, that the latter has also found some serious underlying strength. Oil Energized: True, the previously air-tight link between oil and the loonie has weakened notably this year, but higher crude is still an underlying support for the currency. This week’s OPEC+ deal to nudge up production 500,000 bpd was not a bad compromise, and WTI firmed a bit further to just above US$46. While that’s still well down from the start of the year (when it was hovering closer to $60), it’s also a long way from the spring horror show of negative prices. We don’t see a lot of near-term upside for crude prices, but suspect that the $50 handle will be gripped at some point in 2021. Other Commodities Cruise: While oil always dominates the commodity spotlight, it’s worth recalling that other commodities combined carry a slightly larger weight in the BoC’s price index (and thus for the Canadian economy overall). And, there, the news has been much more upbeat this year. The BoC’s ex-energy commodity price index is now up 13% y/y, with all four components up. Not bad for a year with the biggest annual drop in global GDP in the post-war era. Copper, lumber, gold, gas, and now crops have all been big drivers. Fiscal Fling: More than one commentator was shaking their head this week at the seemingly bizarre coincidence between Canada’s blow-out budget deficit in the fiscal update and the loonie’s strength. (To paraphrase: “How can the currency possibly be climbing amid this awful deficit news??”) We dig into the fiscal details in this week's Focus Feature, and there is little doubt now that Canada is a world leader in 2020 on growing the budget deficit. In fact, taking the provinces into the fold, it looks like the broad shortfall will rise by almost 20% of GDP. Not to be in the least bit cavalier about these staggering figures, but financial markets are clearly giving a pass to budget deficits that deal with the pandemic (we shall see about investor tolerance for large shortfalls in the future). Markets seem much more focussed on relative growth outlooks, and insofar as fiscal policy can support future growth, deficits aren’t immediately a negative for currencies. Growth Outlook: Picking up on that last point, Canada also finally reported its Q3 GDP figures this week, and they actually came in well light of expectations. While the 40.5% annualized sprint was a record, it was about 7 ppts below consensus. Yet, our estimate of annual activity did not budge (from -5.7%), as prior quarters were revised to something slightly less awful, and September printed a solid 0.8% rise. Combined with October’s early estimate of a 0.2% nudge up, and the good jobs data for November, it now looks like the economy will hang in there with modest growth in Q4 (even with new restrictions in the second half). And, for 2021, we remain comfortably above consensus in calling for 5.5% growth in Canada. If anything, with the ongoing wave of fiscal support, strong momentum in housing, supportive commodity prices, and tantalizing vaccine news, there is actually upside to the call. Where next? We remain moderately constructive on the Canadian dollar, mostly due to the view that the U.S. dollar will soften further in the coming year. As well, a global recovery, solid non-energy commodity prices, and some additional recovery in oil all bode well for the currency. While we are concerned about the big deterioration in Canada’s fiscal position relative to others, as well as very real competitiveness challenges for the country, we are on balance looking for the currency to hang on to its most recent gains in 2021. Amid this week’s run of headline events in Canada—jobs, GDP, the fiscal update, bank earnings—the latest home sales figures for November may have been a bit lost in the shuffle. But they are still important and telling. Some commentators suggested sales “sagged” a bit in the month. Umm, yes, from sky-high levels. We estimate national home sales were up nearly 25% y/y in November, while average transactions prices likely rose around 13%. Curiously, these numbers are almost identical to the results in the largest city (Toronto), and what’s notable is just how consistent the gains are across the country (shutdown or not). In seasonally-adjusted terms, sales likely dipped a tad from the record highs in the past few months. And, it’s no secret or surprise that the condo market is beginning to show some real signs of softening. Average prices in the GTA, for instance, even dipped a bit from a year ago last month. But that does not detract from the much bigger picture that housing remains on wheels and will on balance add to growth in this extremely difficult year for the economy. One truly eye-popping stat from the Q3 GDP results was a cannonading 187% annualized spike in residential construction. That alone accounted for almost a quarter of the overall advance in the economy in Q3. The outsized strength in housing has no doubt caught the eye of policymakers—one noteworthy aside in Ottawa’s fiscal update was a plan to tax vacant homes owned by non-resident investors. |