Tag: foreign exchange

Has the momentum changed on the US dollar?

Posted by WFG – September 28, 2011

Does the currently rally in US dollar show a paradigm shift?

The US dollar has recently been trading stronger. This trend started after the last FOMC meeting announcement on September 21. Most people have the impression that the strength has been due to risk aversion and it’s relationship to the US dollar. But it is possible that because the fed has not increased its balance sheet to stimulate the economy after QE2, and therefore not printing more US dollars, the currency might be fundamentally worth more. This relationship is especially apparent when we look at the CAD/USD pair. Read the rest of this article

Canadian Monetary Policy Unchanged, Loonie and Productivity

Posted by winflowfinancial – June 9, 2011

The central bank of Canada on May 31 announced no change to the benchmark interest rate, marked the continuation of the relatively loose monetary policy. At the same time, the Canadian dollar remains at $1.02 USD level, after dropped from over 1.05. Many investors are expecting the Canadian dollar to remain at or above par with the US dollar for a considerable amount of time, because the Fed is expressing no intention of tightening monetary policy, while Mark Carney did say in the news release that

“To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be eventually withdrawn, consistent with achieving the 2 per cent inflation target.”

which many finds as indication of tightening the policy.

There was also a note specifically on the exchange rate,

“ the persistent strength of the Canadian dollar could create even greater headwinds for the Canadian economy, putting additional downward pressure on inflation through weaker-than-expected net exports and larger declines in import prices.”

The fact that a stronger Canadian dollar may have deteriorating effects on the productivity of Canadian companies was reported earlier in April. On April 15′s Financial Post, several articles pointed out that the stronger loonie reduces productivity, attracts less foreign capital, and increase the real supplier price of imported goods. Some excerps

On productivity:

“Higher commodity prices boost the loonie, and that in turn can squeeze manufacturing, boost incomes and employment in services and the public sector (as the government becomes flush with tax dollars), and by encouraging development of less economically viable resource bodies.”

On Foreign Direct Investments:

“The more productive an economy, or the more goods a worker can produce in an hour, the higher that country’s standard of living, economists say. Canada, however, has long underperformed in that regard, particularly in relation to its largest trading partner, the United States.

The issue is now further complicated by a Canadian dollar that has climbed above parity with the U.S. greenback, and which will hurt exports for years, Bank of Canada governor Mark Carney warned on Wednesday.”

On supplier prices:

“The reality is that the underlying prices that Canadians pay and Americans pay really don’t change that much over time, but the currency has these huge swings that can make this sort of comparison shopping between Canada and the U.S. go all over the place,”

Monetary Policy Changes in Europe, Australia and Canada

Posted by winflowfinancial – May 6, 2011

Since last year, a number of developing countries have been tightening their monetary policies. While the Fed’s FOMC meeting on April 27 marked another period of easy monetary policy in the United States, central banks of other developed countries set their monetary policies differently.

Eurozone

After a series of debates, the European Central Bank (ECB) finally decided to raise the interest rate by a quarter per cent in the Euro area. The Euro appreciated under the anticipation of further rate hikes. The anticipation was then eased as the ECB announced no change to monetary policy today (May 5).
The decision must be very difficult for ECB officials as there has to be a well balance between the wealthy and not so wealthy countries in the single currency area. On one hand the Germans are complaining about inflation and on the other hand Greece, Ireland and Portugal are still in debt trouble. President Jean-Claude Trichet said on May 5 that “We are never pre-committed and we can increase rates whenever we judge it appropriate”. And analysts interpreted that as an adjournment for further rate hike decision beyond July.

The yield on 1-year Germany government bond is currently 1.34%

 

England

Bank of England released monetary policy decision today (May 5) stating no change to the interest rate of pound sterling and the amount in asset purchasing programme. The interest rate has been kept at 0.5% since March 2009.

Since the UK economy is still showing very slow, if any growth, the central bankers have not shown any signs of tightening money supply.

The yield on 1-year UK government bond is currently 0.66%

 

Australia

The Australian economy achieved fast growth in the past two years, and the benchmark cash rate was raised to 4.75% in November last year, following a series of rate hikes started in October 2009, when the rate was 3.0%. The monetary policy has not been changed during the past half year.

In the monetary policy decision just released on May 3, the central bank believe inflation is due to “effects of production losses due to the floods and Cyclone Yasi.” And
“as the temporary price shocks dissipate over the coming quarters, CPI inflation will be close to target over the year ahead.”

In addition, the monthly report also stated that ““The rising exchange rate will be helping to hold down prices for some consumer products over the coming few quarters, over the longer term, inflation can be expected to increase somewhat if economic conditions evolve broadly as expected.”, which analysts find hawkish.

The yield on 1-year  Australian government bond is currently 4.95%

 

Canada

The Canadian economy has recovered fast from the financial crisis. Bank rate in Canada was raised from 0.50% to 1.25% in summer 2010 and has been kept unchanged since September 2010.

The currency has been trading above par with the US dollars since the beginning of this year and is still strong. The Bank of Canada officials have not given any signal of policy changes so far. But many expect a rate hike in this summer. In addition, a majority government was the result of the federal election just ended three days ago. This government is pro business and has a strong dollar policy.

The yield on 1-year Canadian government bond is currently 1.35%

Question: Does strong Canadian dollar affect the economy?

Posted by winflowfinancial – May 4, 2011

Question:

The Canadian GDP in Feb, as reported today, has declined by 0.2% MoM, contrary to the expectation of 0.5% increase previously. The decline is more pronounced particularly in manufacturing, wholesale trade and transportation. This reminds me of the previous article I read, regarding the impact of a strong loonie. Also it quoted a research saying that Canadian companies face a 1.5b of additional cost for each one cent increase in value of CAD against USD.

Although I didn’t manage to verify this number, it at least shows that impact of a strong loonie is ever exist, especially to export related industries since most of Canadian exports are to the USA.

However, the BoC overnight rate has been kept near zero, and the heat in Canadian bonds is slowly cooling. That said, it seems that it is not a problem of a strong Canadian dollar, but rather a problem of a weak US dollar, which the Canadian officials cannot control.

Therefore my question is, to what extent is it possible that Canada will get out of this structural problem, and what are the possible solutions. Will these become a paradigm shift, since CAD is expected to remain above par in the foreseeable future?

Response:

By structural problems you mean the strong Canadian dollar and its effect on the economy of Canada, the Canadian dollar’s strength is more of USD weakness, and when will the CAD exchange rate reflect the domestic economic fundamentals or will the export structure and its reliance on US trade have to change? Let us list and question all of the observations.

  • Is the strong Canadian dollar responsible for the decline in GDP? It is possible but on the surface it is hard to tell.  We need to look at all of the components and analyse each for the cause.
  • A strong Canadian dollar decreases foreign Profit of Canadian corporations: Canada is a major commodity producer. Commodities are priced in USD so if the change in price denominated in USD is less than the change in USD/CAD exchange rate, the profit expressed in CAD will fall.
  • Bond yields have stabilized but
    still at the low end of the historical data: who is buying the bonds?
  • Inflation in Canada: headline vs core inflation reported. Also what the average man on the street feels about inflation.
  • Unemployment in Canada: Demographics, percentage of public sector employment.
  • Political situation, government response: government acceptance of higher CAD over USD.
  • General feeling, business start-ups: based on current election, the public is happy.

 On the surface the strength of the Cnd dollar looks fundamentally valid given comparables with the Usd. Each bullet demands more attention and I will address this in the near future.