By Michael O’Neill
Who doesn’t like a Ferrero’s Kinder Surprise? It is a delicious milk chocolate, egg-shaped treat with a layer of sweet milk flavored crème. Even Kentucky’s Colonel would describe it as “finger-licking good.” Even better, every egg comes with a “surprise” inside.
Kinder surprise is so popular in Canada that the federal government created their own version. It’s called the Kinder Morgan Surprise.
It isn’t a mass-produced confection but rather a one-off, multi-billion dollar purchase of a pipeline and pipeline project. The Kinder Morgan Trans Mountain Pipeline system is the only pipeline system transporting crude oil and refined products from Edmonton, Alberta to British Columbia. That pipeline was built in 1953. Kinder Morgan has spent the last six years attempting to build a 1,150-kilometer parallel line in order to increase capacity from 300,00 barrels per day to 860,000 b/d.
B.C is opposed to the expansion for environmental protection reasons. Provincial and municipal governments have been accused of ‘dragging their” feet when issuing permits with Burnaby BC accused of preventing Trans Mountain access to city lands.
On March 8, Alberta threatened to cut off all shipments to BC. Three weeks later Saskatchewan issued a similar threat. The Trans Mountain pipeline expansion was threatening a Confederation crisis.
Then Kinder Morgan got fed up with the delays. On April 8, it announced it was suspending all non-essential activity on the TM expansion project, adding if the issues were not resolved, they would cut their losses and run on May 31.
The Government of Canada had approved the pipeline. BC was threatening its legitimacy and kindling a Confederation crisis. The Federal Liberals had to act. They did.
Prime Minister Trudeau and Finance Minister Morneau nationalized the Kinder Morgan-owned Trans Mountain Pipeline system and the expansion project. They paid $4.5 billion which gives them ownership of the existing pipeline and the right to expand it.
They said they did it to create and protect jobs. They said they did it to help strengthen the middle-class. And they did it without knowing what the final cost will be.
Kinder Morgan estimated the cost of the Trans Mountain pipeline project at $7.4 billion. What is unclear is if that cost is on top of what the Canadian government paid for the assets or if it included the $4.5 billion value of the company.
For many residents of British Columbia, it isn’t a treat. For Canadian taxpayers, the surprise could be very nasty.
The Bank of Canada came up with their version of a Kinder Surprise. They issued a somewhat hawkish policy statement which caught many market participants off guard. Traders were expecting the BoC to leave the target for the overnight rate at 1 ¼%, which they did They also expected a cautious-sounding statement that acknowledged on-going trade war concerns. Instead, it had an upbeat tone. It read; “Inflation in Canada has been close to the 2 per cent target and will likely be a bit higher in the near term, than forecast in April.” It said that activity in the first quarter was a little stronger than projected and noted that exports were more “robust” than predicted. The statement concluded with “developments since April further reinforce Governing Council’s view that higher interest rates will be warranted to keep inflation near target.”
Canadian dollar traders liked what they heard. USDCAD touched 1.3039 in Europe and traded at 1.2864 after the BoC statement.
However, it is easy to get distracted by the noise and today has been very noisy. Canadian dollar traders have been focused on domestic issues, but global developments will reassert themselves as key drivers for the Loonie.
Italian politics have roiled currency markets since last week, notably EURUSD. The single currency dropped from 1.1830 on May 22 to 1.1510 on May 29. Two Euro-skeptic parties are attempting to form a coalition government. The President rejected Their choice for Economic Minister. If a suitable candidate cannot be found, Italy may return to the polls by the end of July or September.
NAFTA issues are not far from the front pages. The health of the trade negotiations took a turn for the worse when President Trump threatened 25% tariffs on car imports. The Canadian dollar will take a hit if the talks do not result in a new deal.
US trade disputes elsewhere are another source of tension in FX markets. Mr Trump has initiated spats with China, Australia, and the Eurozone in the past few months. Each spat threatens to disrupt global growth. As a major exporter, these spats undermine the Canadian dollar.
The Federal Reserve is in tightening mode. The CME FedWatch tool assigns an 81.3% probability that the FOMC will raise interest rates on June 13. That has helped to support the US dollar. However, a series of soft economic reports have raised concerns about the pace of the rate increases. The odds for another hike after June are less than 47%. A slower pace of US rate hikes, while the BoC is in hiking mode, will fuel Canadian dollar gains.
Oil prices are a concern, not just to Canada but the global economy. The US has threatened to put sanctions on Iran which would disrupt oil supplies. Venezuela and Nigeria are having production issues. Saudi Arabia and Russia have said they would consider raising production quotas at the June 22 Opec meeting to avoid disrupting the global economy from a spike in oil prices. If WTI oil prices break below $60.00/barrel, the Loonie will underperform while gains above $72.00/barrel support the currency.
The Kinder Morgan Surprise may prove to be a tasty treat for Canadian’s, but global issues are still some of the fundamental driving forces behind Canadian dollar price swings.