Canada’s rebound in the first half of 2017 was “surprisingly strong” and, seemingly, a good news story, says Luc de la Durantaye.
But it also pushed the Bank of Canada “to start tightening monetary policy by raising rates twice, [which caused] a back[ing] up in the long end of the curve and you had a very strong Canadian dollar,” says de la Durantaye, head of asset allocation and currency management at CIBC Asset Management, and manager of the Renaissance Optimal Inflation Opportunities Portfolio.
Read: BoC plays too close to the chest, disrupts market
The result was “tightening financial conditions – quite rapidly.” And, says de la Durantaye, “This is likely to bring some economic slowdown [for the rest of the year]. We’ve seen [that] in the export sector particularly; exports in Canada slowed this summer quite markedly, and we do have a trade deficit that has increased.” (In August, Canadian exports fell for a third consecutive month and the deficit rose to $3.4 billion, from $3 billion in July.)
- What Canada’s hot streak means for interest rates
- IMF warns Canada’s high debt levels could weaken economy
As a result, he adds, we’ve “heard the BoC putting a note of caution toward future interest hikes,” leading up to tomorrow’s interest rate announcement from the central bank.
In a September 27 speech, Governor Stephen Poloz said, “There is no predetermined path for interest rates from here,” causing markets to forecast a slowdown or halt of 2017 hikes. Before coming to that conclusion, he gave examples of what the BoC is monitoring, a list that included economic capacity, inflation and elevated household debt.
Read: Monetary policy to be data dependent: BoC and Business sentiment moderates: BoC poll
“I think we’re going to see the Canadian dollar giving up some its recent gains,” says de la Durantaye – as of Oct 18, the loonie was sitting at US$0.80, compared to US$0.74 at the beginning of the summer. Also, over the next few months, he predicts, “The Canadian economy will hit a soft patch; not a recession, by far, but a soft patch.”
What we hear from the trade deal negotiations is “they’re hard and slow to develop,” says de la Durantaye. “So there’s some concern about what kind of agreement we’ll end up having or what kind of modifications we’ll see. There’s some degree of uncertainty there.”
Round four of the negotiations ended with “exceptional bitterness,” The Globe and Mail reported on October 18, with “the United States presenting a series of deeply disturbing and unacceptable proposals.” The deadline for an agreement has been extended into next year, leading to talk of what may happen to Canada if the negotiations fail.
When it comes to the negotiations and their impact, “we approach the question by thinking that there’s a high degree of integration between the Canadian, U.S. and Mexican economies,” says de la Durantaye. “That, in itself, means there needs to be a certain level of agreement, and trade needs to continue to flow between the three countries.”
If that doesn’t occur, he adds, “all three will see economic uncertainty.”
Ultimately, de la Durantaye expects uncertainty to exacerbate the expected economic slowdown. However, he says, “we don’t think [we’ll see] major changes [that] are going to be detrimental to the Canadian economy, simply given the degree of integration in North America.”