By Michael O’Neill
If Jane Austin were around today (she would be 243 years old), President Trump would probably be her fodder for another book.
Pride and Petulance were on full display at the June G-7 meeting in Charlevoix, Quebec. The host and the highest profile guest were equally guilty.
The idealistic, artsy, Leader’s Program evoked images of a day camp for bunny-hugging, granola eating, limousine liberals envisioning an alternate reality.
It was a far cry from the original meeting program in 1975. (G-6, Canada joined in 1976). The 1974 oil shock, and subsequent financial crisis spurred some leaders to act. Their goal was to have a “productive exchange of views on the world economic situation, on economic problems common to our countries, on their human, social and political implications, and on plans for resolving them.”
The Charlevoix G-7 Leader’s Program did not have much interest for US President Trump, He came to talk trade and tweeted as much before his arrival. The details of his trade discussions with Prime Minister Trudeau are not public. We don’t know if they were one-on-one, cordial, discussions or if they were part of a larger group talk. Whatever they were, Mr. Trump didn’t seem unhappy.
He was effusive in his praise for Canada in his G-7 closing press conference. He said: “It has worked out to be so wonderful. The people of Canada are wonderful, and it’s a great country, and a very beautiful country.” He sounded committed to keeping some sort of trade with Canada. He even said his relationship with Justin was a 10.
Prime Minister Trudeau wasn’t so polite. He mockingly called out Trump for saying steel and tariffs were a National Security issue. He said that Canadians were insulted by the remark because both countries have fought side by side since WWI. He added that Canada would respond to US tariffs with “tariffs of our own” saying “Canadian’s will not be pushed around.”
President Trump, comfortably ensconced in the luxury of Airforce One, enroute to Singapore, took exception to Trudeau’s comments. Actually, he had a tantrum, a Twitter tantrum to be precise.
In a series of tweets, he ordered his reps not to sign the G-7 communique, and accused Mr Trudeau of making “false statements. He wasn’t finished. In his Singapore press conference, he warned that Trudeau’s’ remarks “will cost Canadians a lot of money.
It already has. The elevated trade tensions since April have contributed to a nearly 31/2 cent drop in the value of the Canadian dollar against its US counterpart.
The Federal Open Market Committee (FOMC) isn’t helping the Canadian dollar, either, but they are not proud and petulant. Instead, they were Proud and Pushy. Proud for the way the US economy is growing and pushy for pushing US interest rates higher.
On June 13, the FOMC raised the Federal Funds target band by 0.25% to 1.75%-to-2.00%, in a widely-telegraphed move. The dot-plot forecast moved up a notch suggesting there could be two more rate increases in 2018. The statement was upbeat with subtle tweaks to the language showing a more positive outlook for growth. The Fed dropped the phrase about Fed funds being below “levels expecting to prevail in the longer run.” That omission suggests more rate increases are in the pipeline.
The Bank of Canada has a problem. On May 30, they opened the door to a July rate hike. They maintain that rate hikes are data dependent and recent data support a move. They were positive on the economic outlook and expected wage growth to encourage an increase in consumption.
Will President Trump make them close it? His tariffs on steel and aluminum imports start July 1. His trade tirades and threat of more tariffs on cars and complaints about Canada’s dairy and agriculture supply management system suggest further tariff action is a possibility.
On March 7, the BoC was expected to raise interest rates. They didn’t. The BoC statement said, “trade policy developments are an important and growing source of uncertainty for the global and Canadian outlooks.” If trade uncertainty sidelines the BoC in July, widening CAD/US interest differentials will drive the Loonie lower.
Fortunately, Canadian dollar losses are cushioned by high oil prices. Maybe not. The correlation between WTI oil and the Loonie has been shaky over the past few weeks. Oil price gains were not leading to Canadian dollar gains. Oil price losses could be detrimental.
The WTI oil rally that began last August at $45.45/b may have ended in May with the break below $65.90. targets $60.00/ on a move below $62.55/b.
The June 22 Opec meeting in Vienna will be telling. The Cartel and Russia announced production cuts in November 2016. One of the objectives was to bring global crude inventories down to their 5-year average. That goal was achieved in May 2018. The June Oil Market Report says global production in May was 21 million barrels below the 5-year average.
The Opec meeting will be interesting. Last week, a rumour circulated that the US government asked Saudi Arabia to increase production by 1 million barrels per day. The increase would be to counter price rises from shortages due to Iran sanctions. Market share is also an issue. At current prices, US production is soaring, and their exports are eating Opec’s lunch.
The Loonie may not have seen a lot of benefit from recent oil price gains, but it could be in for a bad time if prices drop.
There are a lot of negatives stacking up against the Canadian dollar and Pride, and Petulance just adds to its woes.