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Canadian Dollar Crosses Head For the Kitchen Sink - 25-Aug-2009 Action
Folks, I apologise for not being able to post my daily UK and Europe briefings for the last days, almost week now. I have been quite tied up. Anyway, I thought I would post this little snippet which must be what is causing the bad fortune for the Canadian Dollar this evening. Came across this while starring at my GBP short positions.
BOC Council Member Timothy Lane's speech is causing a stir in the Canadian Dollar crosses. Lane notes that there two important risk factors to the Canadian economy's recovery:
First, it's important to bear in mind that a good deal of the impetus for the recovery, in Canada and worldwide, is coming from the public sector – from policy actions by governments and central banks. The scale of fiscal expansion has been quite substantial. Monetary policy has also been eased aggressively, bringing policy interest rates close to their effective lower bound in most advanced economies. In Canada, the target overnight rate of 1/4 per cent is reinforced by our conditional commitment to keep the rate at its current level until the middle of next year. This monetary easing counters other factors – such as tighter lending conditions and wider-than-usual yield spreads on corporate bonds – that would otherwise have resulted in tighter overall financial conditions. Other central banks, given the situations they have been facing, have gone even further by providing additional stimulus through quantitative and/or credit easing. In many countries, the authorities have also had to provide substantial direct support to financial institutions facing difficulties. Although we have been spared that in Canada, this support has been an important bolster for the global recovery. While these policy actions have been timely and effective, they imply that the incipient recovery depends to a considerable degree on official action. At what stage will private demand be robust enough to make the recovery self-sustaining? Clearly, we haven't reached that point yet.
.. and the part that sticks out like a sore thumb in the speech minutes:
A second important risk is the possibility of persistent strength in the Canadian dollar, which would work against the positive factors that I mentioned earlier. The recent rise in the dollar is, in part, a reflection of the same factors that are leading to a recovery in Canada, notably the rebound in commodity prices. It is also a result of a more generalized weakening of the U.S. dollar, as global financial conditions normalize. Other things being equal, a persistently strong Canadian dollar would reduce real growth and delay the return of inflation to target. If a stronger dollar were to alter the path of projected inflation relative to that presented in our July Monetary Policy Report, we would need to take that into account. As we have said before, even though we are at the effective lower bound for our policy rate, we retain considerable flexibility through the use of unconventional monetary policy instruments, including quantitative easing.
The full text of the speech minutes is available at the Bank of Canada website.
As of this writing, Canadian dollar is down north of 4.3% against the US Dollar and 1.3% against the Yen. I hope that explains the shorts which must been blown out of this pair. The full speech minutes contain a lot of interesting notes on his views regarding the economy and what monetary policy tools may be deployed in the medium term.
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the cad is range bound right now... I dont see the massive short squeeze... sure its lost the correlation with S&P but who cares.
and for all those fundi traders who base CAD USD rate on the price of oil, one should remember that the price of nat gas is really more important... but not that real fundamentals really matter anymore anyway
oh and for those who have followed "BoC speak' for a while contradictory statements should be something new
current quote is $0.9203 as of 10:14pm EDT Aug 25
this graph is the 5 day graph as of 5:30 Aug 25
http://lh6.ggpht.com/_EWgGEn9tcbo/SpSZviy3MmI/AAAAAAAAACk/so45MGkXn08/cd...lots of chatter in Canada about a strong dollar but I think its already baked in -- when Oil tanks that is what will bring it to heel.
The Canadian dollar is a special case. No other country is as dependent on the US as a source for manufactured exports. Although down from a peak of 87% of all exports in 2002, the US still took over 80% of Canadian exports in 2005. The combination of a stronger Canadian dollar - which has risen over 40% against the greenback since 1999 - and the protectionist "Buy America" actions of many states has resulted in devestation among Canada's manufacturing sector. But, since Canada's fiscal position is so much better than the US's, and we don't have the looming spectre of filling the empty Social Security "trust fund", or paying for whatever dog's breakfast of a health care plan that BamBam passes, the Canadian dollar continues to appreciate, falling only when our ridiculous group of federal politicians threaten the breakup of the country, or the installation of a coalition of four left wing parties against our present Conservatives. Now that the opposition seems to be at its wits end (not a very far trip, mind you), it has fallen on the Governor of the Bank of Canada and his minions to talk the dollar down against the US buck.
Well it certainly does seem the case that the BoC does like to freak out investors in Loonies.
I do think though, that lots of middle class folks will be heading south for their Christmas shopping this year. Those that still have jobs that is, oh yeah and have their passports.
The point being, the Canadian economy, while seriously reliant on the US for trade, is getting the net benefit of being savers during these deflationary times as you so correctly opine.
Eric Sprott does not agree, nor do I. U/E is much higher in Canada. I will be a landed immigrant there by the end of the year due to marriage so I watch the situation closely. Basic facts:
1) The BOC can print money just like the US and QE by said entity will just enable their demise.
2) RBC and TD also have their own printing presses--who knew, but it is true.
3) Within the 5 chartered banks, RBC, TD, and CIBC are all in trouble. They are financial supermarkets with plenty of risk. RBC owns a D- rated bank in the US...lets see how that works out.
4) Toronto residential RE has been in massive bidding wars since April-- a dear friend is a realtor there-- and the largest condo construction at Bloor and Yonge has been defaulted on by a mob gang of financiers from Kazakhstan but is in the process of being bailed out. We'll see. It's one of the many crane operations going on in Toronto that have come to a screeching halt over the last year.
In sum, I trust Eric Sprott more than the price of oil. He has no faith in the World Economic Forum rating of Canadian Banks as Number 1 http://www.weforum.org/en/initiatives/gcp/Global%20Competitiveness%20Report/index.htm
So as far as the $CAD goes, I'm waiting for a pullback. At .91 today, I am not getting near the bang for my buck at the lows in March of .76. They are not consumers like the US--within the tax system who can afford to be. When you look at CraigsList in Canada, people want near what they paid for any item. Food is much more expensive and the GST and other taxation prevents them from buying what they want, let alone what they need. There is a melting pot of immigrants not paying taxes but sucking on the health care system, and overall, if we catch another cold, they may catch pneumonia. The only answer is in commodities and their enormous supply of water. Should we go into hyperinflation, good for Canada. Should the bear market in the US get back underway, the $CAD is going down. They will never have organic growth due to too much space and too little population.
If you trusted Eric Sprott with your money over the last three years, you are not a happy camper. He's doing well year to date, but look at these ugly returns:
Sprott Canadian Equity Fund 1 year -39.27% 3 years -7.04%
Sprott Gold & Precious Minerals Fund 1 year -8.73% 3 years -10.67%
Sprott Energy Fund 1 year -59.48% 3 years -16.20%
Sprott Growth Fund 1 year -46.00% 3 years -11.26% - -
Sprott Global Equity Fund 1 year -30.20%
Sprott Small Cap Equity Fund 1 year -35.48%
Interesting. I'd like to know where you get your data. Tin foil radio perhaps?
The BoC is NOT going to indulge in QE the way the Fed has in the US. Canada's budget deficit at the federal level will be between C$50-70 billion. In the context of a $US 1.3 trillion GDP economy, this is pretty small beer, compared to what's going on south of the border. And my wife works at the corner of Front and Spadina - she hasn't noticed any reduction in the cement trucks rumbling to all the condos being built.
RRE prices in Toronto are up about 5% from last year, and the total number of sales in June and July were higher in 2009 than they were in 2007 and 2008. The only place where they have significantly dropped is the previously red hot Alberta market, where people were paying $3,000 a month for a crummy one-bedroom in Fort McMurray or Medicine Hat. A little cooling of the oil-patch just restored some sanity to these prices.
RBC and TD are in no danger of failing. CIBC did make a lot of bad RE loans in the US, and they are hurting, but are still unlikely to fail. And please, provide a source for your claim that RBC and TD have "printing presses". If you mean that, in a fractional banking system, each new deposit lets them create more loans, so do all the banks and credit unions in Canada. If you mean something different, prove it please, or STFU.
"The BoC is NOT going to indulge in QE the way the Fed has in the US."
Don't be so sure:
The Canadian dollar tumbled more than a cent Tuesday after the Bank of Canada upped the ante in its verbal assault against the currency's ascent by suggesting it could take the unprecedented step of buying up securities in the open market to lower borrowing rates further if the loonie threatened the recovery.
http://www.financialpost.com/story.html?id=1928098
Why the hell are you shorting the GBP at this stage? QE has had its effect with for instance AUD at 1.95. I cannot see EUR going down and as for the greenback its heading to $2 days.
EUR is most overvalued POS out there. their financial system is more highly leveraged, they are massively exposed to all the troubled spots in the world, and they have no unifyed ability to do anything like QE on the scale we have.
USD would have risen already if not for the sustained attempts of Bernasske to keep it down - almost like a monetary game of chicken with the central banks of export dependent countries.
sleazy linking practices; borderline fraud ..http://www..
hat tip: gay porn and deceitful, slimy operators
Question: What is wrong with a "strong dollar"?
Proximate answer: You lose exports and jobs.
Non-proximate answer: You lose exports and jobs because there is a vast over-supply of labor and cheaper-to-make products in the world. All the benefits of a stronger dollar go to people WITH dollars who become richer and to foreign investors/creditors.
---
Solution: Allow a stronger dollar, but combine this policy with lower tax rates for the middle/lower class and higher rates for the wealthy and stock owners who benefit from a strong dollar and companies that outsource.
Lower tax rates? Hahahahahahaha!!!
It's Canada! Won't happen.
Some argue that the CAD is essentially a petro-dollar. Just lobby the FSA/CFTC to actually crack down on this stupid oil speculation and in all likelihood both oil & the CAD will tank.
Or they could tighten monetary policy which would finally pop the stupid RE bubble in Vancouver and Toronto, which would cause a panic in stocks & all the foreign investors would probably flee from all things Canadian in general.
Oh yeah, and I'm sure it's been mentioned before. The BoC governor here is, yes, yet another well-placed Goldmanite.
yes in the great communist way, tax the rich ,always tax the rich... what should be done is lower taxes for everyone, and less gvt meddling let the markets work it out... eventually this is what will have to happen when all the QE, programs, bailouts, borrowing from my kids doesn't work (example: Japans lost decade)... it really pisses me off the party is 'on' based, still based on the over consumption and over extending that people generally live by... sorry I didn't use my house as an ATM, I donate to charity and save, live prudently and now I'm to be penalized for the socialist rest because you were all living large... you should pay for your excesses and lack of will not me... as a result I am not spending, I have lots to spend but I will not... I will save more to invest and wait again for down and when you're crying and there is no more bailout or low interest rates to save you, then I will still not spend and offer even less for your house...
This is an intersting thought because I have been thinking about population control as an economic issue.
I got through much of an MBA and one of the things I fond amazing about economics was how silly the assumptions made are. the financial crisis proved it, but those in power have devoted their lives to what they believe and they aint going to change. Esp when the elites profit so much.
I am am always infuriated by how deflation gets such bad press. deflation is the chemotherapy for the cancer of too mcuh debt. they confuse the painful cure for the fatal disease. deflation puts more money in savers pockets and increases spending power. it does not help out debtors which is the financial industry so it is made out to be bad.
Ceteris Paribus, I do not agree!
that solution is a bag full of tricks and corruption...
the dollar should be convertible to gold, tax rates
should be low for everyone, and tarrifs erected
to protect jobs....
exporting is not a virtue....domestic markets should
be developed first and foremost...with the capital
flight in progress over the past 30 years there
won't be much to export any way....whether in services or goods....
exports are not lost because of labor conditions -
they are lost when value is lost...value is created
by capital investment and innovation.
Tariffs could be elected to replace jobs, I've debated this option, but I'm not sure if enacting these sorts of tariffs would be more efficient than simply allowing offshoring and outsourcing and then redistributing the wealth by increasing the progressiveness of the tax structure.
Of course, this is assuming the theoretical risk that the foreign nation will appropriate our businesses and capital does not exist, which I don't think we can assume away. In only this case, erecting tariffs would make more sense (i.e., taxing jobs sent to China...).
The problem with tariffs is it doesn't help white collar jobs. That programmer in india isn't going to be affected. So tariffs might be a solution for manufacturing but little else.