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BMO asks who shamed Canada the most: Rob Ford, Justin Bieber or the Canadian dollar Add to ...

These are stories Report on Business is following Friday, Jan. 24, 2014.

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Multiple choice
Bank of Montreal has an interesting pop quiz today:

“Which of the following was the greatest source of infamy, shame and/or humiliation for Canada with their wild, degrading and unpredictable behaviour over the past seven days?” asks its chief economist, Douglas Porter.

It’s multiple choice: Toronto Mayor Rob Ford, fallen pop star Justin Bieber, Vancouver Canucks coach John Tortorella, the Polar Vortex or the loonie.

Strike 1, 2 and 4 because they “weren’t really all that unpredictable (sadly so),” and 3, because he’s American.

Which leaves, Mr. Porter said, the Canadian dollar “as the biggest negative personality of the week.”

Though the currency is back above 90 cents U.S. today, it’s down sharply on the week and some 4 per cent since the new year dawned, having lost almost 7 per cent last year.

This is part of Mr. Porter’s “new concerns for new year,” among the others being the Chinese economy, fretting over more of a stimulus pullback by the Federal Reserve, political turmoil in some regions and, now, the collapse in some emerging market currencies.

“Any lasting strains on emerging markets could undercut the improved global outlook and thus commodity prices,” Mr. Porter said in his report today.

“That was the main takeaway from the severe emerging market crisis of 1997/78 – the Canadian economy struggled as commodities were thrashed, but U.S. growth just sailed ahead, riding the late-90s technology boom,” he added.

“While we suspect that the waters will soon calm for most emerging markets, as they did last summer, investors are likely to edge back down the risk curve as the Fed closes the liquidity tap.”

The commodities that are key to Canada’s economy, the economist noted, have held up “remarkably well” recently.

Those include natural gas prices, which topped $5 (U.S.) today, oil and even gold after last year’s slump.

“With commodity prices holding up, we can actually say – for the first time in at least four years – that today’s Canadian dollar of just over 90 cents is close to ‘fair value’ based solely on resource prices,” Mr. Porter said.

Emerging markets in turmoil
Emerging markets are taking it on the chin, and investors are fretting over whether it could spread from the most troubled countries.

“Argentina, Turkey and South Africa are under tremendous pressure which has yet to ease,” chief currency strategist Camilla Sutton of Bank of Nova Scotia warned of the currency turmoil.

“Outside of the most vulnerable, there are limited signs of a panic; there has been a reaction in the sense that other EM currencies have weakened; however, to date most of the concern continues to lie with the most vulnerable. Markets are nervous and watching closely for signs of contagion.”

Stephen Gallo, the European chief of foreign exchange strategy at Bank of Montreal, cited the trouble as a “real concern,” even among central bankers in the developed economies.

“QE is a large part of the problem,” Mr. Gallo said, referring to the pullback by the Federal Reserve in its bond-buying stimulus program known as quantitative easing.

“Also, the lack of structural soundness and impetus for structural reform are also factors in many of these EM countries,” he added.

“Another issue is the term BRIC. When QE started in 2009, major financial institutions sold their clients the idea of investing in BRIC because the QE money was cheap and because it was a great ‘package’ to sell: ‘Buy BRIC.’ It was a no-brainer.”

He was referring to Brazil, Russia, India and China, the great hope among many until recently.

“A lot of people got long of BRIC when asset prices were probably overvalued,” Mr. Gallo said. “What you are seeing is the result.”

That result included a collapse in the Argentine peso, which plunged after the country’s central bank abandoned its support.

“Combined with sharp moves in other emerging markets including Turkey and Ukraine, which feature political problems of their own, the developments in Argentina and Venezuela morphed into a full blown liquidation yesterday that seems to be continuing today,” added Derek Holt and Dov Zigler of Scotiabank.
“While the events may be unique and their causes unique, they all have a single factor in common: The most difficult challenges faced in emerging markets countries are becoming less sustainable in an environment of rising interest rates globally.”

Inflation perks up
Canada’s annual inflation rate is picking up, but largely on higher prices at the gas pump and still low from a central banking point of view, underscoring the Bank of Canada’s concerns.

Consumer prices rose 1.2 per cent in December on an annual basis, a faster pace than November’s 0.9 per cent, Statistics Canada said Friday.

The rise in the pace of inflation was primarily driven by higher prices for gasoline, which surged 4.7 per cent. When you strip out the impact of that, consumer prices rose 1.1 per cent annually, though also faster than November’s 1 per cent, the federal agency said.

So-called core prices, which exclude volatile items and help guide the Bank of Canada, increased by 1.3 per cent, again at a greater pace than the 1.1 per cent in November.

Stubbornly low inflation has become the focus of the central bank, which earlier in the week sparked a plunge in the Canadian dollar with a rate announcement and monetary policy report that, while giving no signal on interest rates, still left the door open to a cut.

At the very least, the central bank’s benchmark overnight rate, at 1 per cent, is now seen to be on hold for longer.

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