Canadian banks remain standouts in terms of their low level of provisional credit losses (PCLs) compared with banks in the U.S. and internationally. An improving economic outlook, good capital markets, and moderate expected growth in PCLs should remain key drivers for the Canadian banks, said Peter Rozenberg, an analyst with UBS Securities Canada Inc. UBS forecasts Canadian PCLs will peak at 94 basis points (loss provisions divided by loans) in the second quarter of fiscal 2010 and decline to 56 points in fiscal 2012. (A basis point is 1/100th of a percentage point.) "Lower PCLs will be a key factor in double-digit earnings per share growth and 16 per cent to 18 per cent return on equities in fiscal 2011 and 2012," Mr. Rozenberg said. Investors will likely focus on the PCLs and management comments on the credit losses when the fourth-quarter bank results are released beginning this week, he said. UBS has "buy" ratings on Bank of Nova Scotia, Royal Bank of Canada and Canadian Imperial Bank of Commerce.

Currency traders have quickly given up any expectations that China might relax its currency policy and allow the renminbi or yuan to increase significantly faster against the U.S. dollar and other free-floating currencies. The non-deliverable forwards (NDF) market - a futures contract based on the difference between a contract price and the spot price - shows expectations for a higher renminbi over the next year are lower than they were just two weeks ago. "Investors now seem to have given up on the idea that the new language [by the People's Bank of China]signalled an imminent shift in the exchange rate," said Mark Williams, an analyst with responsibility for the China coverage for London-based Capital Economics Ltd. "The NDF market is now consistent with appreciation of less than 3 per cent against the dollar over the coming 12 months," he said in a report to clients. "We think that makes sense." China's currency is linked to the U.S. dollar to encourage exports. China buys U.S. dollars and U.S. Treasuries and sell the renminbi or yuan to hold its currency down.

The yield on two-year U.S. Treasuries are trading near their low and the Canadian two-year government bonds are following along for the ride. Bond traders is seems are convinced short-term interest rates will remain down and that should continue to entice investors into other riskier assets. "Rising unemployment, contained inflation and a fragile recovery do not lay the foundations for early interest rate hikes," said Camilla Sutton and Sacha Tihanyi, currency strategists with Scotia Capital Inc. in a report to clients. "However, there is also ongoing demand for U.S. Treasuries due in part to a lack of alternatives and potentially even some need to shore up balance sheets into the year-end." What is unusual is that the recent drop in U.S. bond yields hasn't created weakness in the greenback against either the Canadian dollar or the euro, they said. The U.S. Treasury is scheduled to auction $44-billion (U.S.) in two-year notes today, $42-billion in five-year Treasuries tomorrow and $32-billion in seven year bonds on Wednesday. How those auctions go will be closely watched by traders.

-By Allan Robinson