The Canadian dollar has been trading near 52-week lows, supporting fed and feeder cattle prices. Canadian year-to-date feeder cattle exports to the U.S. for the week ending November 10 were 175,122 head, up a whopping 59 per cent over year-ago levels. While fed cattle exports to the U.S. are running 19 per cent below last year, it’s important to realize that beef and veal exports to the U.S. are up six per cent over year-ago levels.
Keep in mind the U.S. has experienced consecutive year-over-year increases in calf crops since 2015 and U.S. annual beef production will finish at 10-year highs. The weaker Canadian dollar has clearly enhanced demand for feeder cattle and Canadian beef. Therefore, I thought this would be an opportune time to discuss the outlook for the Canadian dollar because of the significant influence on the Canadian fundamental structure for cattle and beef.
The fiscal policy of the federal Liberal government is negative for the Canadian dollar. Finance Minister Morneau’s fall update released on November 21 set a negative sentiment for 2019. In this fiscal year, Ottawa expects the deficit to finish near $18.1 billion. Next year, Ottawa plans to be in the hole by $19.6 billion. Deficits won’t start to decline until 2021-22. New tax incentives to encourage investment worth an estimated $14 billion will allow manufacturers, oil and gas companies and the clean tech industry to write off capital costs right away. However, this doesn’t come close to matching Trump’s personal and corporate tax cuts. Overall, the fiscal update provided no new measures for Canada’s natural resource-based economy and nothing for agriculture.
The Liberals did not address the Trans Mountain pipeline or other infrastructure investments. The spread between Alberta crude and West Texas Intermediate continues to trade at historically wide levels. Earlier in October, the Iran sanctions — to be implemented on November 5 — were expected to tighten world crude oil supplies. However, the U.S. granted waivers for eight countries importing Iranian oil.
China has been a large buyer of Iranian and Russian oil but Chinese imports of U.S. oil have waned. Even though U.S. oil is not on the Chinese tariff list, Chinese buyers are shying away from U.S. origin. Very little oil from the U.S. has traded to China since August. Last year the U.S. supplied 23 per cent of China’s needs. This isn’t very good news for Canada, whose major customer is the U.S. This is one reason why the trade war between the U.S. and China is negative for the Canadian dollar.
Earlier in October, the Bank of Canada raised their short-term interest rate by 25 basis points to 1.75 per cent. The Canadian dollar has been trending lower since this announcement. It appears that investors are factoring in another rate hike in January and potentially in March. Bank of Canada governor Stephen Poloz will have additional economic data by the end of the year, including trade developments led by the U.S. and China. Canadian gross domestic product is expected to finish the year around 2.0 per cent. A high tax structure, growing government deficit, high personal debt levels and an economy that is lacking competitiveness will cause the Bank of Canada to lag behind the U.S. Federal Reserve by three to six months.
The U.S. economy continues to fire on all cylinders with a turbo. Historically low unemployment, high consumer confidence and strong consumer spending are all factors contributing to the economic growth. U.S. government fiscal policy is positive for the economy. President Trump’s personal and corporate tax cuts, along with the $1.3 billion spending bill on infrastructure, have been unparalleled in past history. Government revenues have declined but it’s important to wait and see. The additional growth in the economy may offset the declining revenue from the tax cuts. This is where right wing and left wing economics differ. Even President Kennedy stated tax cuts were needed to pay off the deficit.
The U.S. Federal monetary policy is considered hawkish. At the time of writing this article, the current Fed rate was 2.0 to 2.25 per cent. A 25-basis point hike was anticipated at the December 19 meeting. If the economy continues to grow at the current pace, there is a high probability of three or four interest rate hikes in 2019. U.S. gross domestic product is expected to finish the year in the range of 3.0 per cent to 3.2 per cent on an annual basis, a full percentage point above Canadian gross domestic product.
The fiscal policies of the U.S. and Canadian governments are on two different paths. One can say these paths are as far apart as east is from the west. U.S. monetary policy is hawkish while Canadian monetary policy is neutral to hawkish. Given this environment, the Canadian dollar will have a difficult time sustaining any strength. U.S. bond yields have been increasing over Canadian bond yields. The widening of the yield spread is negative for the Canadian dollar. The long-term trend of the Canadian dollar is lower. At this time, there are no major changes foreseen in U.S. or Canadian fiscal or monetary policies that will alter this trend.