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Canadian dollar on run to $1.05 as Ben Bernanke 'hits the panic button' Add to ...

These are stories Report on Business is following Friday, Sept. 14, 2012.

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Fed moves boost currencies, commodities, stocks
The Federal Reserve's bold, multi-pronged attack drove currencies, stocks and commodities higher today, putting the Canadian dollar on a run toward $1.05 (U.S.).

The loonie pushed above $1.03 and is expected to go higher still as the U.S. dollar weakens in response to the Fed's latest moves.

As The Globe and Mail's Kevin Carmichael reports, Fed chairman Ben Bernanke and his colleagues took aggressive steps to bolster the recovery and deal with America's unemployment crisis.

That included a fresh bond-buying scheme - the latest round of quantitative easing, or QE3 - and a pledge to hold the Fed's benchmark rate at an emergency low through to at least mid-2015.

At the same time, officials of the U.S. central bank cut their projections for economic growth this year, though they took a more optimistic view of 2013.

The U.S. is hobbled by unemployment, with more than 12 million Americans out of work.

Markets shot up yesterday, and the rally continues today.

Senior currency strategist Camilla Sutton of Bank of Nova Scotia believes the Canadian dollar could reach $1.05 next week, and then bounce around in a range of $1.01 to $1.05 over the next few weeks.

Of course that "turns up the pressure" on Canada's exporters, who have already been hurt by the strong currency.

Western Canada, however, is enjoying a run-up in oil prices, while gold producers and investors watch bullion continue to climb.

"Not only do we have QE3, but we have the threat of QE4," Ms. Sutton jokes, referring to Mr. Bernanke's promise to go even further if need be.

"It is no surprise to see such a positive start this morning of course - when the U.S. Fed announced the widely-expected QE3 on Thursday … the Dow gained a couple of hundred points in two hours, teeing up European equities for a strong start," said chief market strategist David Jones of IG Index in London.

"What wasn't expected – and explains the particularly exuberant reaction by markets – was the open-ended nature of the latest plan, with the U.S. committing to buy bonds until the economy improves," he said in a research note.

"All of this has raised hopes of providing a shot in the arm for the global economy, and mining stocks are the biggest winners so far this morning on the expectation of greater demand for commodities."

Unlike other central banks, the Fed has a dual mandate, not just to keep inflation in check but also to aim for maximum employment, a key driver behind Mr. Bernanke's plan.

But senior analyst Michael Hewson, in a report titled "Bernanke hits the panic button," warned today it's not clear just what the Fed chief can accomplish.

"While some form of easing was widely predicted it remains unclear whether these new actions will be any more successful than previous ones given that the problem is not a lack of credit, but a lack of demand, notwithstanding the inflationary risks more QE will have on food and fuel prices," Mr. Hewson said.

"There are also the additional risks that given that Europe could well flare up again, Mr. Bernanke has pretty much fired his last bullet, given the open-ended nature of the purchases."

Importing U.S. weakness?
Bank of Nova Scotia warns today that Canada is "essentially importing" the weakness of the United States through currency moves.

It's a stark warning from economist Derek Holt, and a key issue for Canada, particularly given the latest reading that showed the country with a record trade deficit.

"In my opinion, this has CAD overshooting via nearly an 8-cent rise against the USD since June," Mr. Holt said in a report today, referring to the Canadian and U.S. currencies by their symbols.

"At a time when the country is already posting record merchandise trade deficits, CAD's march back in the direction of all-time highs won't sit well with the country's exporters," he said.

"Sure a rise in commodity prices will help some of them in the resource-based sectors and provinces, but I'm not sure this will be as powerful an effect as it has been through efforts to model the past. Indeed, as commodity prices have recovered since the crisis, Canada has gone on to post record trade deficits that reflect U.S. weakness, CAD strength and moribund productivity growth that has soured the country's competitiveness."

Mr. Holt also warned that Canadian consumers may be at their "saturation point" on spending and home-buying because while the strong dollar makes imports cheaper, that may not "flow through" to buoy consumer spending. And there's not much "imported content" in homes.

Remember that earlier this week, Statistics Canada noted a big hit to exports, leaving a record trade deficit of $2.3-billion for July. And just today, Statistics Canada reported that manufacturing sales in Canada tumbled 1.5 per cent, marking the third hit in five months. The biggest hits were in Ontario and Quebec.

"With the trade hit the country took in the recently released July report, Q3 is off to a bad start that will make it a challenge to post any GDP growth whatsoever," Mr. Holt warned.

"This is happening while housing resale markets are tumbling in the two biggest cities of Vancouver and Toronto thanks in part to what I've argued to be pro-cyclical regulatory policy."

Housing slowing
Canada's housing market is still buoyant, but has moved to a slower growth trajectory, according to Bank of Nova Scotia's senior economist Adrienne Warren.

As The Globe and Mail's Tara Perkins reports, the bank released its second-quarter survey of global housing trends today, and found that the number of countries reporting that house prices declined from last year outnumbered those reporting increases by more than two to one. Globally, weak consumer confidence, high unemployment and tight credit conditions continue to weigh heavily on housing demand and pricing, the report said.

Activity in Canada’s housing market remains higher than in many, but growth is slowing. Adjusted for inflation, national average prices in the second quarter were 2 per cent lower than the same period a year ago, matching the first quarter’s decline, the report noted.

Competition Bureau goes after telcos
Canada's Competition Bureau is taking legal action against the country's big three wireless carriers, along with their main industry association, to force them to stop what is alleges is misleading advertising that promotes “costly premium texting services” often involving hidden fees, The Globe and Mail's Rita Trichur reports.

The federal competition watchdog said today it's suing Rogers Communications Inc., BCE Inc., Telus Corp, and the Canadian Wireless Telecommunications Association in order to seek compensation for consumers and to levy administrative fines.

Although the wireless carriers did not immediately issue comment, the CWTA stressed that carriers have no control over the text messaging services, adding their only role is to manage the billing process for those third parties.

Auto talks in trouble
The Detroit Three auto makers and the Canadian Auto Workers union are heading toward a strike deadline with no major issues resolved, The Globe and Mail's Greg Keenan reports.

The union said today non of the key issues has been settled, with just three days left to go before the CAW decides to shut down one or all of General Motors of Canada, Ford Canada or Chrysler Canada.

“Each of the three companies remains steadfast in their determination to force deep concessions on both existing and future workers,” the CAW said in a bulletin issued to members today.

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