News & analysis

Today’s release of the Spring Business Outlook Survey by the Bank of Canada could have been a game-changer for the loonie.

If it highlighted a significant collapse in social consumption along with a dramatic decline in businesses CAPEX and hiring intentions, USDCAD would have likely screeched higher in a dramatic fashion. However, despite the headline indicator falling from 0.8 in 19Q4 to -0.7 in 20Q1, the survey was mainly conducted before coronavirus concerns intensified, rendering the release a dud.

The survey was conducted earlier in Q1 this time around than in 2019. Last year in Q1, the survey was conducted in the Feb 19th – March 15th window, which if repeated this time around would have fallen just one day short of the wide-ranging shutdowns. However, this year the survey was conducted between Feb 11th and March 6th, meaning much of the inferences taken from the businesses responses don’t show an up to date representation of the current business climate. For this reason, the BoC decided to hold additional consultations from March 12th-18th. These additional consultations took the form of phone consultations with a small, targeted sample of Canadian firms and industry associations to get a more representative gauge of current business conditions. The main takeaways are highlighted below:

Consumer-orientated firms:

  • Social consumption industries highlighted a complete collapse in orders, reservation and general business activity, leading to most closing due to declining cash flow.
  • Beyond weak demand,  several businesses also said the availability of some inputs, often from China and Italy, had been disrupted, although the access to Chinese-sourced inputs was gradually resuming.
  • Finally, when asked about their upcoming CAPEX, firms generally reported taking a wait-and-see approach.

 Energy-orientated firms:

  • Many of these businesses reported that low oil prices were leading to financing and liquidity issues and were forcing them to reduce costs and operations. The majority of firms viewed the current oil price shock as worse than the episodes of significant oil price declines in 2008 or 2015.
  • Most businesses consulted had already experienced a tightening of financial conditions: equity prices had plunged, credit spreads widened and risk appetite had disappeared.
  • Most firms reported major cuts to capital budgets. On average, companies had revised their 2020 capital spending plans down 30% compared with 2019.
  • Most respondents expected prices for WTI to remain depressed for the remainder of 2020, averaging in the range of USD$30-35 per barrel.

The most interesting comments of the release come from the energy sector

The analogous comments paint a far bleaker picture for energy-sector investment than previously seen. A lack of investment in this industry was a drag on growth in the early part of 2019, but given the current oil price war and the fact Western Canada Select remains near record lows at just $10.75 a barrel,  the outlook for Canada’s energy sector is bleak, to say the least. This only increases the likely loonie reaction on OPEC+ headlines this week. Any reduction in global oil output depends on where the baseline level is taken – if it is current levels then the proposed 10m bpd cut means far less than if it is taken from early Q1, the size of the production cut, and the likely longevity of the cut given the current diplomatic climate in the cartel.  OPEC+ headlines, which are set to be released on Thursday if all runs to plan, along with labour market data for March released at 13:30 BST on Thursday will be key for the loonie heading into the bank holiday weekend.

 

Graph: Loonie unfazed by the BoC Business Outlook Survey as the survey period fails to incorporate the true impact of COVID-19

 

Author: Simon Harvey, FX Market Analyst. 
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