Reply #107: Loonie Watch

[TrogL]

http://members.shaw.ca/trogl/looniewatch.html

Highlights.



http://www.x-rates.com/d/USD/CAD/data30.html

Detailed analysis (http://quotes.ino.com/exchanges/?r=CME_CD)

Up-to-the-minute graph (http://quotes.ino.com/chart/?s=CME_CDY&v=i)

Current TSE:




2005-08-29 Monday, August 29 0.835771 USD
2005-08-30 Tuesday, August 30 0.838997 USD
2005-08-31 Wednesday, August 31 0.840831 USD
2005-09-01 Thursday, September 1 0.843526 USD
2005-09-02 Friday, September 2 0.841751 USD
2005-09-05 Monday, September 5 0.841751 USD
2005-09-06 Tuesday, September 6 0.842673 USD
2005-09-07 Wednesday, September 7 0.843526 USD
2005-09-08 Thursday, September 8 0.845881 USD
2005-09-09 Friday, September 9 0.851136 USD
2005-09-12 Monday, September 12 0.843597 USD
2005-09-13 Tuesday, September 13 0.847458 USD
2005-09-14 Wednesday, September 14 0.845809 USD
2005-09-15 Thursday, September 15 0.842957 USD
2005-09-16 Friday, September 16 0.845594 USD
2005-09-19 Monday, September 19 0.855359 USD
2005-09-20 Tuesday, September 20 0.854409 USD
2005-09-21 Wednesday, September 21 0.856018 USD
2005-09-22 Thursday, September 22 0.857045 USD
2005-09-23 Friday, September 23 0.853752 USD
2005-09-26 Monday, September 26 0.853752 USD
2005-09-27 Tuesday, September 27 0.849113 USD
2005-09-28 Wednesday, September 28 0.848752 USD
2005-09-29 Thursday, September 29 0.852878 USD




I thought I'd spend a little time today (as if I didn't have anything better to do) trying to sort out what's happening with the loonie.

I had a conversation yesterday with a friend of mine who claimed the only thing happening is the greenback is sinking like a rock. It is, but that's not the real issue. If you go to my website (first link above) you'll see that the loonie has been gaining against ALL major currencies and it's been doing it over a long term.

The Bank of Montreal's analysts try and explain some of it here:

http://www.bmo.com/economic/regular/monthlycanada.html

The main risk to this outlook is a stronger Canadian dollar than we are currently forecasting. Such could occur in the face of a general weakening in the US dollar on heightened concerns about the US trade imbalance. Alternatively, financial markets might place greater-than-expected weight on high commodity prices and/or generally strong Canadian economic fundamentals relative to most other G7 economies. An attendant weaker growth outlook would imply a less aggressive tightening by the Bank of Canada through the forecast.

If you read the rest of the analysis, near as I can figure, he's saying "hell it could be worse - the Bank of Canada's slamming on the brakes so hard their feet are bleeding".

For a longer explanation of exactly why the BofC is doing that, check this out (works today only)

http://www.tdsecurities.com/cmu

As expected, Bank of Canada Deputy Governor delivered a speech this afternoon that was seen as relatively “hawkish” by financial markets – although the content was a bit thinner than we would have expected (see yesterday’s Daily). Not surprisingly, there was no
change to the Bank’s view of the world, with Longworth reiterating the bulk of the statement that followed the September 7th rate hike. He repeated that the impact of hurricane Katrina will be modest, that there will be a temporary spike in inflation, that the Canadian economy is operating close to its capacity limits, and that monetary policy is “still stimulative”. Perhaps more importantly, he reiterated that the risks are still “reasonably balanced” – and this, at a time when the Canadian dollar and oil prices are at the centre of
the markets’ radar screens. In sum, there is nothing here to suggest that a pause is in the making. Look for another rate hike on October 18th.

The more revealing part of his speech, however, was not in the scattered comments about the current economic outlook. It was in the fact that a good part of his statement was geared towards explaining the Bank’s forward-looking approach to policy. In Mr. Longworth’s own words, “we need to be aware of the limitations of our policy instrument. It is an instrument that takes considerable time to affect the economy.” Innocuous? We doubt it. Given the public outrage over high gasoline prices, and a manufacturing sector which is becoming increasingly vocal in its struggles, a steady stream of rate hikes does not make for the best optics. Hence, the need to explain to the public that any future rate hikes are not in response to current economic conditions, but are implemented with the view of containing inflation 18-24 months down the road. The simple fact that the BoC feels the need to hammer this point home is one more reason to expect more than just a couple of hikes and a move to the sidelines.

Moreover, although we would have expected it to be more central to his speech, Mr. Longworth did indicate that the Bank of Canada cannot be preoccupied with regional and sectoral patterns of growth – its inflation targets can only be met by focussing on national
pressures on capacity and national economic trends. Notably “under inflation targeting, the record shows that a focus on national measures of pressures on capacity and inflation has led to good national outcomes—and that is the best we can hope for with one
instrument”. No talk here of pausing because of the pain felt by manufacturers in central Canada.

But let's talk about bicycles. The CBC is on strike, so economic coverage tends to be erratic at best but today's morning drive in show was all about the bicycle market in Canada. This is of interest to me because I just had three stolen, all in separate thefts. The second theft actually highlights the problem. The thief stole a bright, shiny new steel-frame Chinese-made bike bought for CAN$125 from Zellers and left behind a beat-up aluminum-frame CAN$1000+ Canadian-made bike (it needs new brake and gear cables - a $25 investment). Canadian manufacturers are complaining that the Chinese are dumping cheap bikes in the Canadian market and putting Canadian manufacturers in a bad position. Canada is threatening to put a 30% levy on Chinese bike imports, but to get around this, one manufacturer is farming his operation out to Vietnam, which does not currently suffer any levies.

The problem is that Canada can't piss off the Chinese too much because they're also buying up everything in sight and paying top greenback for it (assuming they don't re-balance their currency any time in the near future). Canada has put a lot of effort into cultivating the Chinese market with trade delegation after trade delegation going over there to stimulate business so we don't want to piss this advantage away so the bicycle manufacturers may just have to suffer along with all the other markets affected by Chinese imports.

It's still not that simple.

The CBC had a go at it last year:

http://www.cbc.ca/news/background/dollar_cdn/

and one thing they pointed out was:

Cheaper U.S. dollars also provide Canadian companies with an opportunity to invest in the tools that make them more competitive. Much of the software and machinery Canadian companies buy to run their operations are bought from the U.S. A more favourable exchange rate means those companies can invest more in those tools of efficiency.

For some companies, including those that have been reporting weaker American sales because of the loonie's gains, there can be yet another silver lining. As the Canadian dollar rises, the cost of repaying U.S. dollar debt falls, so forest products companies Abitibi-Price and Cascades, and Allstream (formerly AT&T Canada) all reported quarterly gains in 2003 based on the loonie's increase.

...and this was from last year. The only thing that has changed in this equation is that the greenback's in even worse shape and the loonie is higher against all currencies, so it may be advantageous to think about borrowing someplace other than the US. If China starts to get flibbbertegibity about the US debt load, they may have credit on the street.

I'm so confused.