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Business Briefing They ‘pulled the rug’ from under the loonie: Bruised Canadian dollar could slump further still

Briefing highlights

  • Canadian dollar could slump further
  • Bombardier cuts forecasts
  • Markets at a glance
  • German bank merger collapses
  • Nokia tumbles on loss
  • Required Reading

Pulling the rug

The Canadian dollar is hovering at about 74 US cents, having suffered through Wednesday’s central bank decision, and could yet see further losses, analysts say.

The loonie took a hit as the Bank of Canada held its benchmark rate steady at 1.75 per cent and signalled to markets that its next move might not be a hike, as it had previously suggested.

That doesn’t mean a cut, either. It simply means that central bank governor Stephen Poloz, senior deputy governor Carolyn Wilkins and their colleagues aren’t going to do anything for quite some time, at least through this year and possibly through next.

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Bank of Canada senior deputy governor Carolyn Wilkins and governor Stephen Poloz

Sean Kilpatrick/The Canadian Press

As The Globe and Mail’s Barrie McKenna reports, the Bank of Canada removed a key phrase from its statement, one that pointed to eventually higher interest rates, as it also trimmed its short-term outlook for economic growth.

That sent the loonie down, though the currency perked up a tad after Mr. Poloz suggested the next move in the overnight rate is still more likely to be an increase, with an economic pickup still in sight after a recent weak spell.

“The repricing of central bank expectations in the dollar bloc over the past 24 hours pulled the rug from under the CAD and AUD, courtesy of weaker growth or disappointing inflation,” Société Générale said in its morning research note, referring to the Canadian and Australian dollars by their symbols.

The Canadian dollar could lose more ground, observers said, though there are caveats there.

“Given that the Bank of Canada is right and that this is a soft patch, both the upside and downside are limited to roughly 2 cents, with the likely low of 73 cents likely to hold,” said Sébastien Galy, senior macro strategist at Nordea Asset Management.

“Over a longer period of time, better economic data and a cheap valuation should let the Canadian dollar drift higher.”

CMC Markets chief analyst Michael Hewson agreed the currency could lose further ground. But there’s a but there.

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“The slide in the Canadian dollar certainly has room to run, potentially towards the lows we saw in December, however I’m surprised at how dovish the Bank of Canada was,” Mr. Hewson said.

“They appear to have ignored the pickup in retail sales that we saw last month, while the jobs market still looks fairly robust, and wages are rising,” he added.

“If the data continue to pick up in terms of how the consumer behaves, we could well see this dovish bias get tempered. We also shouldn’t forget the U.S. dollar is on a tear at the moment and this is amplifying the effect. A slowdown in U.S. data could temper Canadian dollar downside.”

Some in the markets believe the next move by the central bank will be a cut, which is why the loonie is suffering.

And Capital Economics, for one, thinks the market is still underestimating.

“Over all, we think that the economy could fare a bit better in the near term than the bank expects,” said Stephen Brown, the group’s senior Canada economist.

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“But that doesn’t change our view that persistently below-potential GDP growth this year will cause the bank to cut interest rates three times, starting in the third quarter,” he added.

“With investors expecting just one rate cut … that suggests the loonie could face further downward pressure.”

David Watt, chief economist at HSBC Canada, also expects a rate cut, but not until the second half of 2020.

“Meanwhile, the bank views the current slowdown as a detour and expects above-potential GDP growth to return,” Mr. Watt said.

“This informs governor Poloz’s statement that rates are more likely to rise than to fall if the bank’s forecast is right. Our forecast incorporates a lengthy period of below-potential GDP growth that eventually prompts a rate cut, with headwinds proving more persistent.”

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Bombardier sees ‘soft quarter’

Bombardier Inc. today cut certain projections as it unveiled preliminary results that showed a “soft first quarter.”

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Adjusted EBITDA for the first three months is expected to come in at US$265-million, with adjusted EBIT at US$170-million and revenue at US$3.5-billion, the plane and train maker said.

For the year, Bombardier pegged its revenue at US$17-billion. It cut its adjusted EBITDA forecast to between US$1.5-billion and US$1.65-billion, down from its earlier projection of US$1.65-billion to US$1.8-billion.

“We had a soft first quarter driven by the timing of aircraft deliveries, foreign exchange headwind and a slower production ramp-up at [the transportation unit],” chief executive officer Alain Bellemare said in a statement.

“We expect to recover and meet our aircraft delivery and financial performance targets for the year in our aerospace businesses,” he added.

“At transportation, we are adjusting our 2019 guidance to reflect both changes to our production ramp-up and cost pressure from a few challenging legacy projects as we continue to drive our transformation.”

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Markets at a glance

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News ticker

Bank merger collapses

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From Reuters: Deutsche Bank and Commerzbank said merger talks have ended, with execution risks, restructuring costs and capital requirements dashing German attempts to create a mega-bank.

Nokia tumbles

Also from Reuters: Nokia shares stumbled as it posted a surprise quarterly oss due to a delay in booking 5G payments. It also said the security dispute surrounding rival Huawei was creating near-term pressure to invest.

3M cuts forecast

Also from Reuters: 3M Co. said it would lay off 2,000 workers globally as it reported a lower-than-expected quarterly profit and cut its 2019 earnings forecast due to worsening performance in key markets.

Microsoft pops

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Also from Reuters: Microsoft Corp.’s market value vaulted above the $1-trillion mark for the first time in regular session trade, pulling ahead of Apple Inc. and making it the most valuable U.S. publicly traded company after quarterly earnings and revenue beat Wall Street expectations.

Precision Drilling swings to profit

From The Canadian Press: Precision Drilling Corp. swung to a profit in its latest quarter compared with a loss a year ago as its revenue improved 8 per cent. It earned $25-million or 8 cents a share, diluted, compared with a loss of $18.1-million or 6 cents a year earlier.

Required Reading

Tories, oil executives plot strategy

Top Conservative politicians met with oil-industry executives at a private conference to map out strategy for ousting the Trudeau Liberals in a sign of growing collaboration between the Alberta-based sector and its political backers ahead of the federal election this fall, Jeff Lewis and Shawn McCarthy report.

Oil patch hampered

Surging world oil prices are boosting the fortunes of Canadian producers, but companies remain hampered by insufficient access to markets and a price structure that discourages the use of rail for exports. Shawn McCarthy and Tim Kiladze report.

Mortgage madness

Ottawa’s CMHC mortgage madness is another subprime crisis waiting to happen, Rita Trichur argues.

A blessing for dividend investors

Standard and Poor’s is relaxing its recent warnings about the debt burdens of Canada’s largest telecom companies, easing the financial pressure on BCE Inc., Rogers Communications Inc. and Telus Corp. as they spend tens of billions of dollars to build out their 5G networks, Tim Kiladze writes.

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