With the emergence of Omicron and the price of WTI crude oil continuing to slip, the loonie weakened against the US dollar, hitting 1.28 last week. The swing to risk-aversion mode in global markets on the heels of a new, and possibly more virulent COVID-19 variant being identified has strengthened the yen, euro and Swiss franc. Meanwhile, Alberta’s mid-year update reflects a stronger outlook in oil prices than previously forecasted by the province, resulting in massive multi-year revenue. November saw auto sales decline on both sides of the border as inventory supply continues to lag. Sales could be further dampened by the risk Omicron could hold back production.
Scotiabank analysts and economists weigh in on how economic indicators and trends are influencing currencies, commodities and automotive sales right now.
Foreign Exchange
- The emergence of a reportedly more contagious COVID-19 variant in South Africa, Omicron, has swung global markets into clear risk-aversion mode, which has benefitted the Japanese yen (JPY), euro (EUR), and Swiss franc (CHF), currencies favoured for their stability and haven status. The US dollar gained against most commodity-sensitive currencies, including the Canadian (CAD) and Australian dollars (AUD), as WTI crude oil prices extended their decline from near US$85/bbl in early-November to as low as US$62.50/bbl in recent trading. November saw the worst month for crude (down 21%) since the March 2020 pandemic shock.
- The CAD has been the worst performing currency during the Omicron risk-off period. The CAD is down 1.5% as of Thursday morning, its lowest level since Sept. 20. The USDCAD’s move from sub-1.23 in late June to above 1.28 this past week has left the cross relatively stretched and trading in overbought conditions, which suggests the move higher is at risk or stalling and possibly reversing.
- The outlook for the CAD remains positive despite external factors such as weak commodity prices and the risk-on tone in the markets weighing on the currency, thanks to the expectation a relatively hawkish Bank of Canada (BoC) will hike rates as soon as its April policy meeting. However, a broad uptrend in the USD as the Federal Reserve looks on track to also hike in the second quarter of 2022 (after accelerating its pace of tapering) has limited the support the BoC’s outlook provided. We look for CAD losses to reverse as the market mood normalizes, but gains may be limited to 1.24 in the short run by a Fed that is turning more hawkish.
— Shaun Osborne, Managing Director, Chief FX Strategist, and Juan Manuel Herrera, FX Strategist
Commodities
- A stronger energy price outlook is putting Alberta on a much firmer financial footing than previously forecast. Alberta’s 2021-22 mid-year update outlines massive multi-year revenue driven by very conservative oil price assumptions that underpinned the last plan and the subsequent rise in crude values. Fiscal 2022–24 deficit projections were cut by a whopping $25.8 billion, and shortfalls are now expected to be less than 1% of GDP in fiscal 2023 and 2024. Over the next three fiscal years, the province’s debt burden as a share of GDP is expected to be between 5 and 9 percentage points lower than budgeted and bend downward. Among the provinces that have released updated forecasts, Alberta expects the smallest net debt burden as a share of GDP over fiscal 2023–24.
- Bitumen royalties make up nearly half the $14.2-billion increase in projected fiscal 2022 revenues versus budget. For calendar years 2022 and 2023, the government assumes WTI prices of US$66/bbl and US$64/bbl, which are US$5/bbl and US$4/bbl below the private-sector average, respectively. That profile acknowledges the present risks associated with the omicron variant of COVID-19 — which have already driven a selloff of crude — and the potentially dampening impacts of persistent global supply chain-related issues.
— Marc Desormeaux, Senior Economist, and Laura Gu, Economist
Automotive
- Canadian auto sales dipped in November amid a volatile recovery amid inventory challenges. DesRosiers Automotive Consultants Inc. estimated 110,000 vehicles were sold at a seasonally adjusted annualized rate of 1.45 million units (-13.9% year-over-year). This works out to a seasonally adjusted decline of 7.6% from October’s modest, seasonally adjusted 1.3% gain.
- The recovery in North American auto production in November (+9% m/m, sa) offers hope output will continue to improve into next year, but likely at a pace slowed by a host of headwinds. As Canada competes for limited inventory, days supply continues to edge lower across the country, constraining sales in an otherwise robust-demand environment. Strong job growth in October, which exceeded pre-pandemic levels, and robust wage gains over the past four months, as well as elevated household savings suggest there is more spending to be unwound as the economic recovery advances. Our sales forecast sits at 1.67 million, 1.77 million, and 1.93 million units in 2021, 2022, and 2023, respectively. Uncertainty remains around the pace of production recovery and any material-risk the emergence of the Omicron variant might through further supply chain disruptions. Recent weather events affecting port and rail operation in British Columbia also could temporarily impact the sector.
- US auto sales pulled back a seasonally adjusted 0.7% in November from the previous month. Annualized sales stood at 12.9 million units, increasing the likelihood fourth-quarter purchases will struggle to meet the 13 million seasonally adjusted annual rate. The drop follows a 5.5% m/m (sa) improvement in October that sparked hopes a rebound was finally underway. It likely still is — improving auto production in North America in November is a positive sign — but it will be bumpy. We nudged down this year’s outlook to 15 million units owing to November’s weak performance and less optimism for December. Demand is likely to continue to exceed supply through 2022. We expect sales to increase to 16.1 million and 18 million in 2022 and 2023, respectively. Further disruptions to auto production through pandemic-related supply chain factors remain a material downside risk to this outlook.
— Rebekah Young, Director, Fiscal & Provincial Economics
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