The Canadian economy faces "major downside risks" related to the incoming U.S. administration's trade policies and Republican-backed corporate tax reforms, according to a new report from CIBC Capital Markets.
These risks will impede the Bank of Canada's ability to tighten monetary policy, the report predicts.
"We would need a huge and unlikely upside surprise to push the Bank of Canada into a rate hike this year," said Avery Shenfeld, CIBC chief economist. "Particularly since the Trump administration's trade-policy-by-Twitter and a Republican-backed corporate tax reform plan biased against import content both represent a major downside risk if Canada gets caught in the crossfire."
In the more negative scenario, Shenfeld expects the Canadian dollar to come under pressure. "The shock to U.S.-bound exports would engender a much steeper slide in the Canadian dollar, well beyond 1.39 Canadian dollars per U.S. dollar we expect to see on monetary policy differentials," he explained.
CIBC forecasts that Canada's real GDP will grow by 1.8% in 2017 and 2.0% in 2018, with growth in the energy sector offsetting a reduced contribution from housing and consumption.
The U.S. economy is predicted to show 2.3% growth in 2017 and 2.1% in 2018, although uncertainty is "extremely high" surrounding Trump policies, the bank said.
"For corporate Canada, the instinct would be to judge a becalmed outlook as reason to eschew active hedging for now. But the potential for a Trump in the night bump suggests looking for opportunities to hedge against a pullback in commodities, a weaker Canadian dollar, and a rise in long term rates," Shenfeld concluded.
Toronto based Canadian Imperial Bank of Commerce (TSE:CM, Mkt cap 43.73B, P/E 10.31, Div/yield 1.24/4.49, EPS 10.71, Shares 397.22M) is a global financial institution. CIBC provides a range of financial products and services to approximately 11 million individual, small business, commercial, corporate and institutional clients in Canada and around the world. The Company operates through three segments: Retail and Business Banking, Wealth Management and Capital Markets. The Company's Retail and Business Banking segment provides personal and business clients across Canada with financial advice, products and services in its banking centers or through remote channels, such as mobile advisors, telephone, online or mobile banking. The Company's Wealth Management segment provides advice and investment solutions. The Company's Capital Markets segment provides integrated credit and global markets products, investment banking advisory services and research to corporate, government and institutional clients around the world. More from Reuters »
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