Piling On

The Canadian economy hasn’t really had much to cheer about lately, and it has left a lot of people wondering: Can It possibly get any worse? Well, about an hour ago, DJT confirmed that it can indeed get worse.

About 60 minutes ago Trump announced that one of his first executive orders will be to add tariffs to Chines goods of 10%, but more importantly he will add tariffs of a whopping 25% to Canada and Mexico. As if a faltering real estate market, high interest rates, run away immigration and a dropping currency weren’t enough, we will now add a huge wall ( no pun intended ) to climb for Canada’s exports.

Instantly on the announcement the Canadian dollar plunged against the USD, and currently sits 1.10% lower from pre announcement. In currency terms, losing 1.10% is MASSIVE for a developed world currency . And people wonder why I look and talk about currency so much…… Foreign currency markets are telling us this could be a real problem. Currency traders are thinking this is the real deal, and not a passing issue. The CAD was just starting to get it’s mojo back, and was actually doing quite well the last 3 trading days, but this move tonight erases all those gains, and then some, and takes us well below the floor level that we spoke of last week, and it now means that the CAD probably has farther to fall in the coming days. Even if the fall doesn’t happen, there certainly isn’t much that will get the CAD to climb back up.

Now that we know the currency implications, lets look at bonds – oops, they aren’t looking much better. Again, instantly on the news we saw the US 10 year yield shoot higher as the announcement should mean a positive for US manufacturing, US jobs, and by default the US economy. Again, the Canada 5 year yield was down nicely today on some fairly positive news around the US Treasury Secretary pick by Trump. I guess what Trump giveth on the weekend, he taketh today!! Now, there is a couple of ways this plays out:

1. Yields in the US are higher on the tariff announcement, so that could easily spill over into Canada’s bond market tomorrow morning. Keep in mind that the Canadian bond market doesn’t really have the after hours trading like the US bond market does, so it will be a little harder to see the moves outside business hours until the market opens tomorrow morning. Volume, I imagine will be heavy in the first hour of trading, and could be all over the map as markets adjust to what this now means.
2. Or, the absolute opposite could happen, and the news will mean darker days ahead for Canada’s economy, and the yield will drop on Canadian bonds.

At this point there is just no way to tell which way it will go. If I had to give you an educated guess, I would think that higher US yields will pull up the Canadian yields as well, but that is just my opinion. No matter which way it goes we will see heavy volume, a lot of jumping and jerking around, and the day will most likely finish far away from where it started. If yields head higher, and in a dramatic way, look for lenders to start raising mortgage rates within 24 to 48 hours, on top of the raises they have already done over the last few days.

And just when you thought I might be out of bad news, I have to add some more. Tonight’s Trump announcement will put the BOC in a quagmire. One one hand, they know what reduced exports will do to the economy, and would want to lower rates. However, we just had GDP revised up by Statistics Canada, and the Canadian dollar is already in free fall – cutting interest rates now will simply add rocket fuel to a raging inferno. Based on the data at hand, they just don’t have the justification to cut 50 bps, and even 25 bps may be a stretch at this point. Inflation is ticking up, the dollar is already down, and according to GDP, the economy is muddling through at these current rates. Oh, and of course lets not forget that Uncle Trudeau is mailing damn near half the country some free money, and cutting GST for a couple months. While Uncle Tiff is trying to keep the inflation genie in the bottle, Trudeau is calling in the heavy artillery to blow the bottle to shreds. Right now you have fiscal policy and monetary policy going head to head to see who wins. Uncle Tiff is gonna have some sleepless nights between now and the next announcement.

But, there is always some good news. A lower CAD will start to take the bite out of the tariffs. The lower the CAD goes against the USD, the less of a sting tariffs have. Maybe a lower Canadian dollar is what it will take to make Canadian exports competitive? Maybe Canada will have to get used to a lower dollar. It will encourage Canadian to stay in Canada, buy more Canadian products, and support Canadian industry. Maybe that isn’t such a bad thing?

Let’s also keep in mind that DJT has a way of firing shots across the bow, and maybe this is part of a negotiating tactic? Maybe tariffs will be lowered in the future? If not though, Canada will have to adjust – and fast, to the new economic normal. Normally I would say this is something that can be done, but I have little to no faith in the current people in charge – and before everyone starts complaining, this isn’t a liberal thing, it is just an incompetence thing. I don’t care what party is in power, incompetence is incompetence. Unfortunately, exchanging friendship bracelets is not how global negotiations work, and I have some serious doubts that Canadian leadership has what it takes to negotiate a fair deal for the Great White North.

For now though, we will have to live out the ups and downs, the zigs and zags of both the bond market and the currency market. I feel the next 12 months ( or 12 hours for that matter ) will feel a lot like flying through turbulence. There will be a lot of bumps, your seatbelt best be on, and you may need an airsick bag to throw up in once or twice. As if our jobs weren’t tough enough before!! Remember, it always gets worse before it gets better, but it cannot get better if it doesn’t get worse.

Better days will eventually come, and perhaps todays announcement is what it will take for policies to change, for Canadian leadership to get serious about growing the economy, and to start investing in Canadian business. The first step to recovery is admitting there is a problem, and perhaps if it gets bad enough, people will finally admit the problem exists and something needs to change.