By Michael O’Neill

September heralded the new school year and the return to classrooms marked a spike in the common cold.
It is so prevalent that even the Loonie is feeling congested. And for good reasons. It’s not just one bug—but an entire petri dish of symptoms is leaving the Loonie sluggish and wheezing.

Bank of Canada Governor Tiff Macklem underlined the malaise in a speech to the Saskatchewan Chamber of Commerce on Tuesday. He was there to talk about “Global trade, capital flows, and Canada’s prosperity.” It isn’t pretty.

In short—Canada’s prosperity is roadkill on the global trade highway. Trump’s tariffs are crushing exports, raising costs and crippling Canadian growth. Macklem cited the 27% drop in exports in Q2, and the jump in the unemployment rate to 7.1% from 6.6% in February. He admitted outright that monetary policy can’t undo the impact of tariffs. A rate cut here or there might smooth the ride, but it won’t fix the potholes. He spelled it out clearly: the Canadian economy is now on a permanently lower growth track unless productivity improves and trade is diversified.

Macklem knows it. Rate moves are damage control, not salvation. The best the Bank can do is keep the lights on while the wreckage piles up.

And Trump isn’t the only antagonist. China remains a thorn in Canada’s side. Tensions have simmered since 2009 and boiled over in Trudeau’s era with the arrest of Huawei CFO Meng Wanzhou. Trudeau fumbled that file and poured gasoline on the fire with tariffs on steel, aluminum, and Chinese-made EVs.

Mending Fences

Prime Minister Mark Carney is opting for diplomacy over confrontation. Mr. Carney met with Chinese Premier Li Qiang at the UN and he summed up the meeting by saying “There is a very broad range of commercial relationships that already exist and a much larger range of opportunities for both countries,” and said he hopes to meet with President Xi Jinping at the “appropriate time.”

He is also attempting to improve relationships with India which deteriorated sharply due to that country’s penchant for murdering Indians on Canadian soil.

Mr. Carney’s efforts are to be lauded but they are long-term solutions to a near-term problem. Meanwhile the global supply chain may face another Covid-era style disruption thanks to Trump’s latest speech to the United Nations (UN) and his post-speech broadsides.

Dr. Donnie Strangelove

Dr. Strangelove was an Oscar-nominee movie in 1965 when the Cold War was at its frostiest. The protagonist in the movie was only a US Air Force General, but he shares similar personality characteristics as President Trump, whose eccentricities were center stage at the UN, Tuesday. Mr. Trump lambasted China and India for complicity in Russia’s invasion of Ukraine by being the “primary funders of the ongoing war by continuing to purchase Russian oil.” Afterwards he told reporters that NATO countries should shoot down Russian aircraft that violated their airspace. When asked if the US would support NATO if it blew away Russian aircraft, Trump more or less dodged the question, but he was probably thinking “yes, for a price.”

Powell says “No Risk-Free Path”

The odds that the FOMC cuts rates again on October 29 are over 94%, which are 3 points higher than when Fed Chair Jerome Powell began his speech to the Providence Chamber of Commerce. Powell pointed out the resilience of the US economy and although he noted the slowing of employment gains and rising unemployment, he also pointed out that job openings remain ed steady and jobless claims were stable. What worried him was core Personal Consumption Expenditures inflation were higher than a year ago at 2.9% respectively. Investors may be eager to declare the Fed on a path to steady rate cuts, but Powell is not so sure.

Neither are traders. The S&P 500 is on its fourth straight down day after record highs, 10-year yields are pressing weekly peaks, the US dollar is grinding higher, and the Loonie is taking the biggest beating.

Backs Against the Wall

It’s the annual Major League Baseball wild card race and there are many teams with their “backs against the wall.” In the FX world, it’s the Loonie that has its back to the wall. Chances are it will prevail as it has a lot of support. The RSI (relative strength index) is screaming overbought, the Loonie is bumping into Bollinger band levels where reversals often occur, and speculative short Canada positions are stretched. Taken together, they suggest that the Canadian dollar may need to rally to 73 cents to the USD before a few Tylenols (sorry Dr. RFK Jr.) clear the congestion.