Global Market Insights: USD CAD gains limited; retail rebounds, outlook positive

Market concerns over a possible default by Evergrande, China’s second-largest property developer, gave the greenback a lift mid-week, but the gains were unwound as markets calmed later in the week. While the loonie’s gains against the USD may be limited owing to Canada’s July gross domestic product (GDP) release likely showing a decline, and the US Federal Reserve’s hawkishness, the CAD still stands to outperform key peers. Meanwhile, retail data and company sentiments are looking up. At the virtual 2021 Annual Scotiabank Back to School Conference, most of the attending companies said they have emerged from the pandemic disruption in a stronger position and have taken steps to alleviate continuing challenges such as supply disruptions and labour shortages. Meanwhile, StatCan’s latest retail sales figures show marginal gains.

Scotiabank analysts and economists weigh in on what the pandemic means for currencies and retail sales and outlook.

• The trading week began with heightened risk aversion that supported the US dollar amid fears of a possible default by Evergrande, China’s second-largest property developer, and contagion effects in global financial markets — with iron ore falling to its weakest point in a year. Market worries have calmed since — and weakened the dollar — as the Chinese government seeks to facilitate a soft landing for the highly indebted and insolvent property giant while injecting plentiful liquidity into the system.
• The US Federal Reserve’s announcement and press conference by Chair Jerome Powell provided only a short-lived boost for the USD on Wednesday. Although Powell strongly hinted that a November taper start is likely — and that it may have even been announced this month had August jobs figures not disappointed — on Thursday markets focused their attention on constructive developments regarding Evergrande to unwind the USD’s gains post-Fed. The British pound (GBP) was supported by a hawkish-sounding Bank of England that continues to signal the beginning (possibly earlier) of its rate-tightening cycle despite a multitude of risks in the fourth quarter (end of furlough program, energy crisis, and truck drivers’ shortage). The BoE’s hawkish stance puts the GBP on track to outperform the euro as the European Central Bank tees up larger purchases under its asset purchase program once the pandemic emergency purchase program expires. 
• The USD is liable to strengthen in the coming days as markets turn their focus away from Evergrande developments to prepare for the start of the Fed’s tapering process. Trading activity next week will centre on comments by Fed officials that return to the speaking circuit after the pre-meeting blackout period.
• Specific drivers of the Canadian dollar will be limited to Friday’s July GDP release after preliminary data from Statistics Canada indicated a 0.4% decline for the month — kicking off the third quarter more weakly than anticipated. We expect the Bank of Canada to look past a temporary deceleration in growth and continue with its plans to conclude bond purchases in the fourth quarter, then hike rates in the second half of 2022. While gains against the USD may be limited owing to the Fed’s hawkishness, the CAD still stands to outperform key peers such as the euro, Japanese yen, and Australian dollar, whose central banks remain committed to ultra-low rates for longer.

—  Shaun Osborne, Managing Director, Chief FX Strategist, and Juan Manuel Herrera, FX Strategist

• The 2021 Annual Scotiabank Back to School Conference, held virtually, highlighted some of the key issues and positive changes that Canadian Tire Corp. Ltd., Aritzia Inc., Empire Company Ltd. and Roots Corp. among other companies attending, face this year.
• Common themes discussed were:
  — Most companies say they have emerged from the pandemic disruption in a stronger position, because decisions taken early in the pandemic to adjust to shifting supply/demand dynamics for many required finding innovative solutions, which in turn fostered an enhanced innovation culture.
  — Most expect the supply chain disruptions will persist at least for the next several quarters. For the most part, though, the companies have taken steps to ensure they have inventory for the important back half and are deploying various practices to mitigate this challenge, including chartering ships and increasing air freight.
  — The development of omnichannel capability is a high priority for the companies. The pandemic resulted in growth of online demand in line with levels anticipated three years out. Due to the pandemic surge, most of the companies have far more robust omnichannel platforms than they might otherwise have at this juncture.
  — The companies expect the labour market situation to improve as government stimulus eases, and they look at ways to better recruit and retain workers.
  — Most of the companies presenting at the conference anticipate rising inflation as higher freight and transportation costs associated with global supply chain disruptions, coupled with the labour challenge will likely see input and products costs increase. That being said, most are cautious about managing the inflation in a manner that does not overly burden the consumers.
  — All the companies attending say they have a defined Environmental Social and Governance (ESG) strategy and have expressed a serious commitment to delivering to specific goals.

—  Patricia Baker, Director, Retailing, Global Equity Research

• The preliminary guidance for August retail sales in Statistics Canada’s latest retail sales figures was pushed up by 2.1% month-over-month in value terms. There was zero guidance around the drivers, but we can probably infer that ex-autos drove most of it because our tracking of auto sales pointed to a decline of about 5% m/m seasonally adjusted. Given the mild 0.4% m/m seasonally adjusted rise in headline Consumer Price Index inflation and the solid increases in several retail categories, it’s likely that not all of this was a gain in volumes. I’m estimating that the volume gain was in the high 1% range. Also, the initial guidance around July’s contraction of 1.7% m/m was revised to a dip of 0.6% m/m.
• Combined, the upward revision to July and the strong gain in August are likely driving a quarterly gain in retail sales volumes of almost 8% seasonally adjusted at an annualized growth rate, versus a drop of more than 5% in Q2. Recall that the prior Q2 weakness was driven by lockdowns due to Canada’s third wave of COVID-19 cases.
• At the margin, the upward revision to July at best adds about 0.1% m/m to GDP growth such that the July ‘flash’ guidance of a 0.4% m/m contraction in monthly GDP should turn out to be a little smaller. The August retail guidance would add a similar 0.1% m/m or so to GDP growth. Based solely on high frequency observable economic indicators, a simple regression shows August GDP up by about 0.3% m/m because of the gains in retail, hours worked and manufacturing activity while housing starts fell as a negative indicator for construction activity. The less observable high contact service sectors should add to this estimate for August in such fashion as to probably at least flip the sign on the dip in July.

—  Derek Holt, Vice-President and Head of Capital Markets Economics 

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