1. Welcome to 2017: Here we go again!
Welcome to 2017 my friends. Will this be a safer year for celebrities? Will this be
the year Canada gets its economy back on track? (although the 4 cent hike in gas on
day 1 admittedly doesn’t seem all that promising for us) Will this be the year of The
Donald or do we simply Duck? As much as we all like to prognosticate and soothsay
(sounds like a couple of whacky witch doctor remedies), we can never really do much
more than make these guesses with a distinct personal bias flavouring our predictions.
While certainly true, I also think that there are always a few certainties which, while
perhaps not being prognostications on their own, can significantly influence the future
events in other realms. So, here are a couple to consider as we move into a brand
spanking new year.
I suppose we can’t ignore that 2017 will be the year of Mr. Trump, whether we
understand how it happened or what it might bring. Good or bad, this new regime will
bring change and that, I feel fairly certain, we can bet money on. Picking the specifics?
Well that moves us a little farther out the “odds of that happening” spectrum. Despite
this, I think we can probably safely assume that there will be a period of uncertainty that
we can all look forward to, either with anticipation or trepidation, depending on your
personal beliefs. I suppose we can, at a bare minimum, assume that volatility will, for a
while at least, keep a firm bid tone.
This new year will also bring with it the spectre of an equally unsettling political
period in the artificially created Eurozone. Legislating political love just seems to me to
be destined to failure. Sure, arranged marriages were always a part of the European
political scene ever since the Romans did their great northern and western tours (and
most likely well before that) of Europe, but they tended, even in those times, to be short
term patches to diverse political patchwork fabric. The various tribes of Europe, even
when they evolved to a more genteel “kingdom” structure, never got along terribly well
for any length of time. The defeated or the underdog state would chafe at the bonds that
gave another culture domination over them or even just gave another stronger partner
greater influence. Even if vows were spoken and children exchanged via marriage, the
underlying mistrust remained. The differences have always been too great, and the
roots of each culture too deep, to be eradicated by another countries ruler. This is the
fundamental undoing of the Eurozone. If they could all just be “Europeans” instead of
Germans, French, Greeks or whatever, within the union then the economic model might
stand a chance. However, for a continent that would be hard pressed to say they ever
went 100 years without a major war, this artificial union and the 68 years since the end
of the last war on the continent, make the probability of the warm and fuzzy end to this
story seem more Disney-like than realistic. With voters getting the chance to “Trump”
the Euro movement with major elections in Germany, France and assorted other states
this year, it is hard to see things improving anytime soon.
This brings me to China. By virtue of the sheer size of this economic behemoth, it
can rain down torment on many simply by making little changes. In this globalized
society, there is pretty much no such thing as being “self contained” anymore. Even
“Better Korea” allows for things to cross its border. So, when we hear of things like
China having major structural issues with its banking system or the flow of money out of
China, driven by fear and uncertainty, becoming almost epidemic to the point that
intervention is required to stem the fall of the Yuan, it is hard to feel that China will drag
us kicking and screaming back to economic nirvana. As mentioned above, even when
China does “little things” it can have big repercussions. Like Canada with the US, when
China sneezes, others catch bad colds, even if we missed hearing the sneeze itself.
One such sneeze that was announced at the end of 2016 (and seemingly missed by
most) was the announcement that the CFETS (China Foreign Exchange Trade System)

2. basket index was changing as of January 1. Usually these announcements are formal
and minimal impact to most. This time, however, I think the impact might be significant.
The number of currencies in the basket will rise from 13 to 24. This is being done for a
variety of reasons but the most compelling bit of information is the change in weightings
to the “original 13” members. When you see these changes, it is important to keep in
mind the absolutely massive amount of FX reserves that China has and how these
changes will impact the holdings of each. For the USD, the weighting falls from 26.4% to
22.4% of the total. Since they are adding currencies like Korean Won, South African
Rand and even Mexican Peso, this could create a material bid for these “lessor traded”
currencies during the adjustment period. Equally compelling, but perhaps more
impactful because it is already a vulnerable currency, is the reduction of Euro’s in the
basket from 21.39% to 16.34%. This wave of probable selling of Euro’s to match the
weightings will add considerable pressure to an already emasculated currency. This
might be the straw that breaks the camels back for the once mighty Euro. We could well
see parity flash before our eyes early in 2017 with the biggest political events yet to
come. Sure, they may have started to adjust already but I can’t help but think that
tossing out Euro’s will become more than an “adjustment” in the coming year.
Will all this uncertainty mean much of anything to this small open economy laying
prone along the northern borders of the 48 contiguous states? Well, while things may
not be ideal here, there seems to be a much better, or perhaps safer is a better word,
story to tell here. I fully expect to face the buffeting winds of panic as 2017 moves along
but on a relative basis, I feel that Canada will be a net winner if only because we are not
doing too much wrong to draw attention to ourselves. We may not be lighting up scale
on the “doing good things “ side of the scale but we probably will look good versus a lot
of others. The neutral do well when things are spinning madly. The Loonie in the 1.30’s
should be plenty weak for CDN exporters to the US to make money but it is not the
panacea it once was. A 30% discount to US looks good unless everyone else has been
discounted by 40% or 50% and that, I think, will prove to be the case. CDN producers
will not be able to look to the currency as a magic elixir. It certainly helps but it can’t be
relied on. I expect this to be a tough year but one in which we make structural progress
and perform, relative to our global peers, fairly well. It will not be a smooth ride but I
think the end of 2017 will leave us in a better place than the end of 2016 and that, under
the circumstances, will be a good result!
Have a happy and prosperous 2017!
R. Wayne Osborne
January 2, 2017