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'Open season on loonie': Welcome to a 90-cent Canadian dollar Add to ...

These are stories Report on Business is following Thursday, Jan. 23, 2014.

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Loonie sinks
Welcome to a 90-cent dollar.

The Canadian dollar plumbed new depths today, hitting a low of 89.5 cents U.S. and later regaining some ground to sit just above the 90-cent mark.

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That followed the Bank of Canada rate announcement and monetary policy report yesterday, which further crushed an already fast-sinking currency with the suggestion that interest rates aren't going anywhere at any time soon because of the focus on stubbornly low inflation. Indeed, the door was left open to a rate cut.

Today, the erosion was helped along by a weak economic reading from China.

Coupled with the inflation concern was a line in the report that warned the currency “remains strong and will continue to pose competitiveness challenges for Canada’s non-commodity exports” even with its stunning loss over the past year.

“Until today, the Bank of Canada had been careful not to openly talk down the loonie,” chief economist Douglas Porter of BMO Nesbitt Burns said late yesterday in a research note titled “BoC declares open season on loonie.”

“They effectively gave sellers the green light in today’s monetary policy report by stating that even with the big drop in recent weeks, it remained high and would still ‘pose a competitiveness challenge for Canada’s non-commodity exports,'” he added.

“As if on cue, the currency promptly fell another 1 per cent on Wednesday.”

This all has to do with the central bank’s “bias,” or what it’s thinking about future moves in interest rates.

Given the obsession with disinflation, or declining inflation, some observers have suggested that Governor Stephen Poloz and his colleagues at the central bank may be leaning toward cutting their benchmark rate from its current 1 per cent.

Most, however, don’t see that happening, though they also don’t believe Mr. Poloz will raise rates at any time soon.

What got the markets going yesterday, said chief currency strategist Camilla Sutton of Bank of Nova Scotia, was a shift by the central bank “a bit toward the dovish side of neutral,” which implies interest rates are on hold for that much longer.

“I think this market just wants to be short CAD,” she added, referring to the currency by its symbol.

Some observers also believe that this is a deliberate move by Canadian policy makers to devalue the currency in a bid to boost the country's exports, as a weaker loonie lowers the cost of Canadian goods in the United States.

The Bank of Canada denies any such thing, but everyone agrees that Mr. Poloz, while not driving down the dollar, is pleased with the outcome.

That issue of a potential interest rate cut is playing through the market.

“I think that by June or July we’ll have a much firmer feel for whether the BoC is in cut mode after spring housing data lands and [inflation] likely drifts lower yet over coming months after a temporary rise this month,” said Derek Holt of Bank of Nova Scotia.

The Bank of Canada targets an annual inflation rate of 2 per cent, and, according to yesterday’s report, it doesn’t see getting back there until early 2016.

“The added wild card is the speed of CAD depreciation,” Mr. Holt said.

“I think the BoC is talking down the currency without the inconveniences of doing so explicitly after having been burned by such attempts in the past, but an uncontrolled plunge in CAD that stokes potential import price pass-through effects into [inflation] would garner more attention than the almost benign neglect toward the issue in yesterday’s BoC statement, MPR and press conference.”

A lower currency, of course, doesn’t just boost exports, but pushes up the cost of imported goods, as well, which is what Mr. Holt was referring to in terms of the ripple effect.

“The message that rang loud and clear is that any underperformance in either the economy or, more notably, inflation could spur a rate cut,” said senior economist Sal Guatieri of BMO Nesbitt Burns.

“Unless, of course, the loonie continues to drop a cent each day, as it did after the policy announcement and a further [three-quarters of a] cent overnight,” he added.

“The bank appears to have few qualms about tossing the ‘strong’ loonie under the bus to achieve its inflation target.”

Stephen Gallo, Bank of Montreal’s European chief of foreign exchange strategy, believes the dollar could hit 89 cents by tomorrow depending on the next economic readings to come.

All of this, he noted, comes amid a global backdrop of “abnormal normalization.”

What he means by that is that major economies are recovering, but central banks are printing massive amounts of money. Which means it’s not normal at all. And much of the recovery is due to such excessive stimulus.

“Policy makers are basically firing bullets and fighting fires,” Mr. Gallo said.

“To phrase this in a different way: Any landing of a plane you can walk away from is a good one,” he added.

“Yesterday, the BoC used minimal ammunition but got a decent amount in return anyway. This is not a ‘runaway’ weakening of the CAD mainly because the BoC is sitting on top of it.”

Netflix soars
Shares of Netflix Inc. surged today after its fourth-quarter report late yesterday.

After markets closed yesterday, Netflix announced that its quarterly 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.

Netflix also projected 2.3 million more U.S. members in the first quarter of this year.

EBay climbs
Shares of eBay Inc. also pushed higher after Carl Icahn’s disclosure that he now holds a stake and wants the company to spin off its Pay Pal unit.

EBay said it will do no such thing.

Saputo wins in Australia
Saputo Inc.’s holdout rival in a bidding war for Australia’s Warrnambool Cheese and Butter has waved the white flag, The Globe and Mail's Bertrand Marotte reports.

Murray Goulburn Co-operative Co. Ltd. agreed to sell its shares in Warrnambool to Montreal-based Saputo, a move that will push Saputo’s majority interest in Warrnambool above the 75-per-cent threshold.

Saputo said today it secured majority control of Warrnambool, essentially ending a months-long fight for control of Warrnambool. The win for Saputo gives it a key platform from which to sell into Asian markets where demand for dairy products and milk extracts is growing at a rapid clip.

IBM strikes server deal
IBM Corp. is selling its server operation to China’s Lenovo Group Ltd. for $2.3-billion (U.S.).

The deal, some $2-billion in cash and the rest in stock, had been expected.

The transaction affects some 7,500 IBM employees across the globe, who will be offered jobs at Lenovo, IBM said.

Retail sales rise
Shoppers were out doing their bit for the Canadian economy in November, but they were primarily looking for cars.

And car parts. And electronics and appliances.

Retail sales rose 0.6 per cent in November to mark the fourth gain in five months, Statistics Canada said today.

Nine of the 11 sectors measured by the agency chalked up increases, or some 72 per cent of all shopping.

“Weather and the timing of new product releases had a greater effect on monthly sales than promotional events in November such as Black Friday,” it added.

Among the biggest increases were a 1.2-per-cent jump for autos and car parts, and a 6.4-per-cent boost for electronics and appliance shops.

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