The picture for the Canadian dollar isn't great

I spoke to BNNBloomberg yesterday and I touched on an important point about the worsening picture for the Canadian dollar -- earnings. I read many earnings reports from Q4 and the Bank of Canada is wrong about what was going to happen. They forecast slowing (but still growing) consumer spending and rising business investment outside of energy. That's not happening and it's not going to happen any time soon.

  1. Oil and gas companies cutting investment
  2. Banks earnings soft. Housing is a factor here and I think, critically, that housing data has shown in the past few months that interest rates at these levels are a ceiling.
  3. SNC-Lavalin. The corporate climate is poor. If we're going to wipe out a company because some executives did something wrong, that is a disadvantage. Do you want to invest in a Canadian mining company doing business in Africa or Latin America when the risk is that they are caught bribing someone they get wiped out? That's overly dramatic but it's a symptom of how foreign investor see Canada.
  4. Retail. Not a good picture here. When you go back and read what the BOC wrote about in January, it's clearly off the mark. It looks more like Canadian consumers are slowing down if not stalling. Retails sales data was soft throughout Q4. Via stocks there isn't that much visibility but all the signs have been negative. Leon's was just yesterday and they cited "weakness in consumer spending across the country". Same store sales up just 0.3% in 2018. Sleep Country same store sales were down 2.7% y/y and they cited a "challenging economic environment". Canadian Tire sales were up 0.2%, Sport Chek +2.5% and Mark's +1.8%. Those numbers aren't adjusted for inflation so in real terms those are all negative. Auto sales were also down. The BOC is expecting slower growth in consumer spending here but the risk is zero growth or even a decline in real terms. Remember there was a drop in gasoline prices in Q4 but it didn't translate into anything positive. Dollarama is losing pricing power after pushing it for years and it's not particularly economically sensitive anyway. Loblaws missed on Joe Fresh but said that was due to less discounting. Aritzia still phenomenal growth in a segment that should be relatively sensitive. They have an odd quarter end at Nov 25 and made the point that Black Friday likely pulled spending forward so there isn't a clear picture of the holiday period.
  5. Investment outside oil and gas. The BOC has been arguing forever that this would pick up. Part of that is investment coming from the US and Thursday's USs GDP numbers showed that is indeed healthy. US business investment was up 6.2% with most of that going to equipment and IP, some of which should flow into Canada. Domestically it's tough to encapsulate what hundreds of companies are saying about investment but I can't think of any real highlights. Moreover, the theme in capital markets is reducing debt and reducing leverage. I think that's where the money the BOC thought was going to investment is going to end up.

On net, I'm increasingly convinced the Canadian dollar is going to retest the lows of 2018 and today's GDP number adds to the evidence.