By Michael O’Neill January 20, 2021
Shame on me! For a minute, I believed the Bank of Canada’s (BoC) latest forecasts. So did many FX market participants, judging by the steep rise in the Canadian dollar after the release of the Quarterly Monetary Policy Report(MPR). The BoC upgraded its 2021 economic growth forecast to 5.5% from their 4.6% forecast in October.
Reacting to BoC forecasts is a fool’s game. They may have over three hundred highly educated economists on staff, crunching numbers, and creating models, but their predictions are rarely on the mark.
The July MPR predicted “a sharp rebound in economic activity in the reopening phase of the recovery, followed by a more prolonged recuperation phase. It didn’t happen. The October MPR forecast said, “Canada’s economy to grow by almost 4 percent on average in 2021 and 2022, following a decline of about 5 ½ percent in 2020.” Nope-wrong again.
“A fool and his money are soon parted” is an apt description for the poor fellow who hit the USDCAD 1.2608 bid after the MPR was issued. That’s because prices were 1.2715 just before the Toronto open and they are poised to finish the session in the 1.2750 area. It was a Jonestown-style moment.
Selling USDCAD on January 20, 2021 based on revised MPR forecasts doesn’t make much sense. The BoC expects economic activity to decline in the first quarter, but they anticipate it to be less severe than during the initial outbreak in 2020. They may be out to lunch on that forecast.
Canada is recording a weekly average of 6,700 new cases. In May the highest weekly average of new cases was just 1,797. The Province of Ontario declared a State of Emergency for the entire province on December 26. Toronto and a large swath of the surrounding were already similar measures that were implemented in the spring. British Columbia reintroduced province-wide restrictions on November 19, and like in Ontario, current new COVID-19 cases vastly exceed the numbers seen in April and May.
But that’s just temporary. The MPR explains: “Over the medium term, consumption is expected to gain momentum as more Canadians are vaccinated and employment rises. Progress toward broad immunity both globally and in Canada will support business investment and exports, as pandemic-related uncertainty declines and business confidence improves.”
That sounds great-unless the COVID-19 virus kills you first, which for Canadian’s isn’t so far-fetched. Canada doesn’t have anywhere close to the number of vaccines needed to vaccinate the country. Even, worse, Pfizer-Biotech said Canada wouldn’t get any shipments for the next week or so. They decided to retool their vaccine line at their plant in Belgium, which had a nasty impact on vaccine deliveries to countries around the world.
In fairness, the MPR did say that momentum would increase over the medium term; they just didn’t quantify “medium term.” Three months? Three years?
The Canadian dollar ignored ultra-dovish comments by Governor Tiff Macklem. He suggested that if monetary stimulus is needed, they will consider cutting interest rates, yield curve controls or both.
Financial markets reacted as if Joe Biden’s Presidency heralds a new era of growth and global prosperity. Stock and commodity prices are higher, and the US dollar is on the defensive as traders shift to “risk-seeking” mode.
However, a global economic recovery is likely to be uneven, and Canada is not likely to be anywhere near the front of the pack. Prime Minister Trudeau says that all Canadians who want a vaccination will get one by September. He claims that Canada has “secured 80 million doses” from two approved pharmaceutical companies. But secured isn’t the same as received. Canada is well behind the vaccination curve compared to the UK and US, and if the trend continues, Canada economic growth will also lag.
The Canadian dollar is getting a bit of a lift from the belief that the Biden Administration will be good for the Canadian economy. Perhaps not. Biden is reportedly just as protectionist as his predecessor, (but far less rabid). He favours “buy American “ policies which could shut Canadian companies out of supporting or supplying infrastructure projects which are part of his $1.9 trillion Relief plan.
Biden will cancel the Keystone XL pipeline. He never liked it.
Bidens’ pick for Agricultural Secretary is not a fan of Canada’s tariff protected dairy industry. On December 9, the US requested formal consultations under the USMC Agreement on free trade, due to dairy regulations. Canada and US trade relations will remain testy. You just won’t read about issues on Twitter.
Governor Macklem’s hints of possible new stimulus seem at odds with the MPR forecast for 5.2% growth in 2021. If the economy was going to rebound that sharply, why is more stimulus needed?
In the immortal words of The Who: “I won’t get fooled again.”