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Briefing highlights

  • Wide range of forecasts for loonie
  • Markets at a glance
  • What to expect from Fed minutes
  • What to watch for in inflation report
  • Walmart reports amid Amazon fight
  • What else to watch for this week
  • HSBC profit disappoints
  • Home Depot profit up in quarter

Crazy as a loon

The range of forecasts for the Canadian dollar is rather wide as analysts redraw their outlook in the wake of the financial turmoil and projections for the greenback.

There are no doubt more, but a scan of the forecasts over the past few days suggests a range of 8 cents, from 76 to 84 US cents. The time spans are different, from midway through 2018 to the end of the year, but that's a big spread if you're an exporter, importer or traveller.

There's a lot going on that could affect the CAD – the loonie's currency symbol – from oil prices and the fate of the U.S. dollar to the outlook for Bank of Canada interest rate hikes and negotiations to remake the North American free-trade agreement.

On the lower side, from Andrew Grantham and Royce Mendes at CIBC World Markets:

"The recent depreciation in CAD has merely mirrored the move in oil prices. Despite a weak employment reading to open the new year and fourth-quarter GDP setting up to miss the BoC's projection by half a percentage point, there's been little change in market expectations for the central bank. With a 75-per-cent chance of more than one more hike priced in for 2018, we still see room for a reduction in expectations to push the loonie weaker. Add to that the fact that oil is likely to lose more ground as U.S. production ramps up, and CAD could be trading around 76 cents in the second half."

On the higher side, from Daniel Hui and Niall O'Connor at JPMorgan Chase:

"Since our last Currency Views [report], we have upgraded our CAD forecasts, removing a NAFTA-scare discount in 1Q and forecasting more strength by end-18 on higher oil prices and a wider dollar discount … We now look for USD/CAD to decline to 1.19 by the end of 2018 … Most other indications are that the negotiations are proceeding, if slowly, and that all three sides are acknowledging that the process will likely take significantly more time. Greater patience means that the earlier perceived soft deadline of end-March is a less meaningful risk event, and for this reason we removed an earlier assumption of a temporary widening out of a CAD risk premium into the end of 1Q (thus moving our earlier 1.30 1Q target down to 1.22 in our recent revisions)."

What Mr. Hui and Mr. O'Connor mean is that they expect the U.S. dollar to decline against the loonie, with that 1.19 translating to a Canadian currency worth about 84 US cents by the end of this year. As for the 1.30 and 1.22, they mean 76.9 US cents and about 82 US cents. Because currency analysts oft look at it from the U.S. dollar perspective, that down means up for the loonie.

Société Générale has also revised its outlook, now projecting a Canadian dollar valued at about 81 US cents by the end of the second quarter, 82 by the end of the third, and almost 83.5 by the end of the year. For the first quarter of 2019, Société Générale puts the loonie at 84 US cents.

"We think a further 6-per-cent euro appreciation and a 5-per-cent fall in USD/CAD will take the [U.S.] dollar back to levels last seen in 2014," said Kit Juckes, Société Générale's chief foreign exchange strategist.

Over the past two decades, Mr. Juckes noted, the U.S. dollar has "mostly" moved in sync with real American bond yields. But not always.

"In 1998/1999, the dollar went sideways, only really rallying when the Asian crisis took other currencies down," Mr. Juckes said.

"In 2004/2007, the dollar fell even as the [Federal Reserve] hiked rates and the U.S. economy grew because money was flowing to more interesting assets," he added.

"And in 2015/2016, the dollar rose while U.S. yields were rangebound, as the [European Central Bank and Bank of Japan] bought huge quantities of domestic bonds. Now, the dollar is weakening because the global economy is growing."

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Markets at a glance

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What to watch for this week

We may get a sense this week of whether restaurant and certain other businesses have been swallowing their higher labour costs or passing them on to their customers.

That's one of the things economists will be looking for when Statistics Canada releases its monthly inflation report Friday.

The numbers will be scoured "for evidence that the large minimum wage hike in Ontario in January is pushing consumer prices higher," Royal Bank of Canada economists said in projecting the report will show a hotter 0.5– to 0.6-per-cent increase from December.

"Prices for accommodation and restaurant food, in particular, are probably among the most susceptible to minimum-wage driven price increases."

Those aren't the only things you may be paying more for. A big part of that monthly jump will have been because of a spike in the cost of filling up your car, as well as your stomach.

Analysts believe the annual rate of inflation will come in at about 1.5 or 1.6 per cent, down from December's 1.9 per cent, but that's because of sharply higher costs in the consumer price index a year earlier.

January is traditionally a "seasonally strong" month for inflation readings, said Benjamin Reitzes, Canadian rates and macro strategist at BMO Nesbitt Burns.

"Indeed, seasonality suggests that we'll see some chunky increases in the CPI over the next five months," Mr. Reitzes said.

"And, there's some upside risk from the 20.7-per-cent increase in Ontario's minimum wage. There's anecdotal evidence of price increases at restaurants, and broader cost pressures are possible."

This week also brings the stragglers of the quarterly earnings season, with some big players still to come.

"Still-solid earnings results have also proved supportive [of markets], with nearly 80 per cent of S&P 500 companies topping expectations about four-fifths of the way through the reporting period," said BMO senior economist Robert Kavcic.

Canada's major banks also kick off their quarterly reporting.

Here's the rest of the calendar:

Monday: Shutdown

Markets are closed in Canada, the U.S. and China. In Europe, though, finance ministers will be discussing – guess what? – the Greek bailout.

If you're one of the lucky ones enjoying a holiday today, enjoy.

Tuesday: Walmart vs. Amazon

It's a light day on the economics front, but Walmart Stores Inc. is one of the companies releasing results as the quarterly earnings season winds down.

An employee scans items at a cash register at a Wal-Mart Stores Inc. location in Burbank, Calif., Tuesday, Aug. 8, 2017.

Walmart "has been one of the few U.S. retailers that has been able to take the fight to Amazon in terms of the online shopping experience," said CMC Markets chief analyst Michael Hewson.

"Big box retailers have come under increasing pressure from the low overheads model that Amazon is able to bring to the table, however Walmart's stronger grocery offering is helping it ride out the storm," he added.

"At its last trading update at the end of last year, it showed that revenues in its U.S. stores were holding up well, however, the recent increases in wages and bonuses announced recently by its management could cause the company to revise down its outlook for 2018."

Others reporting results include Duke Energy Corp. and Keg Royalties Income Fund.

Wednesday: Fed in focus

Investors will be perusing the minutes from the late January meeting of the Federal Open Market Committee, the Federal Reserve's policy-setting group.

"The FOMC teed up the prospect of another rate rise next month at its most recent meeting at the end of January, by upgrading its outlook for inflation on a 12-month basis while staying optimistic about the health of the U.S. economy," Mr. Hewson said.

"Given recent volatility these minutes may not be too instructive, but as long as U.S. data continue to show increasing price pressure, then a March rate hike could be the first of many this year."

Amid the tumult in South African politics, John Ashbourne of Capital Economics expects to see that inflation eased to an annual pace of 4.6 per cent in January.

"Meanwhile, the country's finance minister will present the 2018 budget, providing an opportunity for President Cyril Ramaphosa to lay out his new fiscal plans," Mr. Ashbourne said.

"Investors will be keen to see whether the new president replaces the current minister, Malusi Gigaba, with someone from the more fiscally conservative wing of the party."

There's also a reading on U.S. home sales, expected to show a jump in January of about 0.7 per cent, manufacturing purchasing managers index readings from around the world, and quarterly results from HudBay Minerals Inc., Iamgold Corp., Maple Leaf Foods Inc. and Trican Well Service Ltd.

Thursday: Movies, gift cards, T-shirts and bank accounts

An interesting day, this, with a lot of scope.

First up is the second estimate of fourth-quarter economic growth in Britain, and economists expect no revisions from the first reading of 0.5 per cent.

Then we get Statistics Canada's monthly report on retail sales for the key month of December.

Observers generally expect to see a drop of 0.5 per cent, though it could be bigger than that, with auto sales dragging down our shopping.

"Adding to the softness is an anticipated decline in underlying sales," said BMO's Mr. Reitzes.

"Increased activity on Black Friday has pulled sales into November in recent years, and 2017 was likely no different. The ubiquity of gift cards also serves to push sales into January, acting as another headwind on December."

Among the companies reporting results, it's always interesting to see Cineplex Inc.'s earnings because they tell you how the blockbusters fared and how you're helping the company's bottom line by buying popcorn.

People make their way an escalator at the Cineplex Entertainment company’s annual general meeting in Toronto on May 17, 2017

Canadian Imperial Bank of Commerce, meanwhile, starts the ball rolling in its sector, and we'll also hear from Canfor Corp., Gildan Activewear Inc., Loblaw Cos. Ltd., Magna International Inc. and SNC-Lavalin Group Inc.

Friday: The cost of living

Alongside the Statistics Canada report come inflation readings from Japan and the euro zone.

Royal Bank of Canada reports quarterly results, as does Berkshire Hathaway Inc.

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