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Canadian dollar plunges: ‘How to target an exchange rate without saying so’ Add to ...

These are stories Report on Business is following Wednesday, Jan. 22, 2014.

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Loonie sinks
The Canadian dollar sank today after the Bank of Canada highlighted the country's stubbornly low inflation and the fortunes and impact of its currency.

The loonie, as Canada's dollar is known, sank to a low in the area of 90.2 cents U.S. by late afternoon, from above the 91-cent mark before central bank governor Stephen Poloz and his colleagues on the policy-setting panel released their rate announcement and monetary policy report.

Of course, there was no change to the Bank of Canada's benchmark overnight rate, which stands at 1 per cent, but the central bank stressed that "inflation is expected to remain well below target for some time, and therefore the downside risks to inflation have grown in importance."

As The Globe and Mail’s Barrie McKenna reports, the central bank warned that disinflation pressures will remain stubborn, which suggests interest rates are on hold for longer, adding pressure on the currency, which has been sinking because of the easy-going, or “dovish,” Bank of Canada and weak economic readings.

“The path for inflation is now expected to be lower than previously anticipated for most of the projection period,” the central bank said.

At the same time, though, the Bank of Canada gave no signal as to where rates are headed, and when.

Some observers believe Canadian policy makers are deliberately driving down the dollar through their comments and signals, though the central bank denies this.

Having said that, they would certainly welcome a lower currency, which helps drive exports through lower prices on goods sold in the United States.

In fact, the central bank said today that “stronger U.S. demand, as well as the recent depreciation of the Canadian dollar, should help to boost exports and, in turn, business confidence and investment.”

In the monetary policy report, the central bank warned that even in the face of its depreciation, the dollar “remains strong and will continue to pose competitiveness challenges for Canada’s non-commodity exports.”

That statement from the report certainly caught the market’s attention. As chief economist Douglas Porter of BMO Nesbitt Burns put it, it’s “as close as they will come” to suggesting the loonie is still too strong and that policy makers are pleased by the loonie’s slide.

“Today’s statement found a way to maintain its mostly neutral stance, sound a bit more upbeat on the global outlook, modestly upgrade its Canadian growth outlook, and yet still keep the downward pressure squarely on the Canadian dollar,” he said.

“Their elevation of too-low inflation risks - which Poloz has highlighted before - and the direct comment on the currency did the trick. Suffice it to say that the bank is welcoming the weakening Canadian dollar with open arms, partly because it in turn reduces the pressure to consider trimming interest rates since the lower currency will begin to pump some life into inflation.”

Sébastien Galy of Société Générale, in a research note titled “BoC or how to target an exchange rate without saying so,” also cited the emphasis on inflation.

“The BoC is in the business of reviving Canada's flagging exports and weakening the CAD seems an implicit target,” Mr. Galy said in an earlier report, referring to the currency by its symbol.

“[Prime Minister Stephen] Harper mentioned last week that the USD was undervalued if anyone needed a helpful hint, without incurring the wrath of the USA,” he added, also referring to the U.S. dollar by its symbol.

“This policy of hinting at the CAD as a tool for rebalancing the Canadian economy follows the same procedure as other commodity producers.”

Netflix soars
Shares of Netflix Inc. surged in after-hours action today after a stellar fourth-quarter report that showed profit climbed to $48.4-million (U.S.), or 79 cents a share, and U.S. membership climbed by 2.3 million to 33.4 million.

Further, Netflix now projects 2.3 million more U.S. members in the first quarter of this year.

Netflix stock was about by more than 16 per cent within about 30 minutes of the Nasdaq close.

BlackBerry climbs
In case you missed it, shares of BlackBerry Ltd. have been staging something of an awesome comeback.

Short sellers haven’t missed it, seemingly sensing a change in the wind.

The stock has gained about 30 per cent this year, and was up again today, by more than 8.5 per cent on Nasdaq, to retake $10 (U.S.) and then some.

BlackBerry shares are still far below where they stood a year ago, by some 37 per cent, but clearly the smartphone maker’s new chief executive, John Chen, is making his mark.

Of late, BlackBerry stock has surged on brighter analyst reports, and a vote of confidence from the U.S. Defense Department.

And, as The Globe and Mail’s Sean Silcoff reports, the company unveiled plans late yesterday to sell the bulk of its Canadian real estate holdings, which analysts say could be worth more than $500-million.

Also, according to new numbers from Markit, the short positions in BlackBerry have fallen to 12 per cent of its stock from more than 20 per cent, Reuters reports.

Adding to the confidence is a move by Mr. Chen to snap up BlackBerry stock. According to information filed with regulators, he bought 25,000 shares on the open market on Jan. 13, at $8.25 each.

Really big blue
Shares of IBM Corp. slumped today in the wake of its disappointing fourth-quarter report after markets closed yesterday.

Revenue slipped 5 per cent in the quarter to $27.7-billion (U.S.), falling shy of what analysts had projected, while sales in its hardware business took it on the chin.

IBM profit rose to $6.2-billion or $5.73 a share, which included a tax-related gain, from $5.8-billion or $5.13 a year earlier.

What’s that mean for chief Ginni Rometty and her top managers?

“While we made solid progress in businesses that are powering our future, in view of the company’s overall full year results, my senior team and I have recommended that we forgo our personal annual incentive payments for 2013,” Ms. Rometty said.

British unemployment eases
Britain’s unemployment rate has fallen to the lowest level in five years, putting Bank of England Governor Mark Carney in a tricky position as the jobless rate moves to within a fraction of a threshold he set to consider raising interest rates.

Britain’s economy has performed far better than expected in recent months and figures released today showed the unemployment rate had fallen to 7.1 per cent for the three months from September to November, 2013, The Globe and Mail's Paul Waldie reports from London.

Several economists have said the unemployment rate could fall to 7 per cent by March, matching a target Mr. Carney set to consider raising rates.

Mr. Carney set the target last summer, saying the bank would consider increasing its key lending rate, currently at 0.5 per cent, once unemployment hit 7 per cent. That wasn’t expected to happen until mid-2016. Some economists have suggested Mr. Carney may have to reset the threshold and drop it to 6.5 per cent since a hike in rates now could thwart the recovery.

Pension plan improves
Air Canada’s domestic pension plans have swung to a small surplus from a solvency deficit of $3.7-billion a year ago, The Globe and Mail's Bertrand Marotte reports.

The airline said today preliminary estimates indicate that its pension plans will be in a “small surplus position” at Jan. 1, 2014.

Elimination of the deficit came about as a result of several factors, including a 13.8-per-cent return on investments last year; amended pension benefits that are estimated to have trimmed the deficit by about $970-million; contributions by Air Canada for the year of $225-million; and the application of an estimated prescribed discount rate of 3.9 per cent to calculate future obligations.

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