These are stories Report on Business is following Wednesday, March 19, 2014.
The Canadian dollar tumbled again today as a stronger U.S. currency added to a two-day rout.
The loonie, as the dollar coin is known in Canada, sank quickly yesterday after comments by Bank of Canada Governor Stephen Poloz, who painted a weak picture of the economy and left the door open to a cut in interest rates.
Today, it sank even further, to 88.8 cents U.S. by mid-afternoon, as the Federal Reserve’s policy announcement pushed the greenback higher, while stocks declined. The currency was hovering just below the 89-cent mark late in the day.
As The Globe and Mail’s Kevin Carmichael reports, the Fed, under its new chair Janet Yellen, announced a further pullback in its monthly bond-buying stimulus program, and changed its so-called forward guidance, or how it sends its signals.
“According to chair Yellen, QE is likely to end in the fall and the first interest rate hike is likely to be six months later, which implies a Q215 interest rate hike, as opposed to market expectations of August 2013 and economist consensus of Q315,” said chief currency strategist Camilla Sutton of Bank of Nova Scotia.
“This is a significant USD positive particularly against currencies associated with dovish central banks like the ECB and [Bank of Japan],” she added, referring to the U.S. dollar by its symbol.
The U.S. dollar spiked after the Fed announcement.
“The statement essentially caused U.S. yields to move higher and this cause a sell-off in the loonie and movement in to the U.S. dollar,” said Rahim Madhavji of Knightsbridge Foreign Exchange.
“The floodgates have opened and flows of funds are leaving Canada for the U.S. dollar. The U.S. dollar has a lot of momentum and the Canadian dollar is out of favour. With U.S. yields rising and the U.S. on track to continue to reduce stimulus, while the Bank of Canada is very cautious, it seems likely that the U.S. dollar will continue to gain momentum as the Canadian dollar doesn’t have a catalyst in the near term.”
The drop in the loonie comes not because of, but as, a new finance minister takes the helm.
Prime Minister Stephen Harper today tapped Joe Oliver, who had been natural resources minister, to fill the shoes of Jim Flaherty, who announced his departure late yesterday.
The erosion of the loonie is expected to help juice the economy this year and next. A weak currency makes a country’s exports cheaper, and thus more attractive.
“A weaker Canadian dollar enhances the competitiveness of Canadian goods in the U.S. market – historically, a 10-per-cent depreciation boosting export volumes by 3.3 per cent in the following two years,” Royal Bank of Canada’s chief economist, Craig Wright, said today in a new economic forecast.
By the end of last year, Mr. Wright noted, Canadian exports were 5 per cent below the pre-crisis peak.
RBC believes the loonie will sink to the 87-cent level by the end of this year, and 85 cents by the end of 2015. That’s different from the projections of some other economists: Both Bank of Montreal and Scotiabank forecast about 87 cents by mid-2014, and a pickup to the 90-cent level by the end of the year.
RBC also projects today that the economy will expand by 2.5 per cent this year, and 2.7 per cent in 2015 as the export sector weighs in.
- David Parkinson in ROB Insight (for subscribers): Is Flaherty leaving Canada in the lurch?
- Tavia Grant: Slower growth, lower rates new normal as boomers age, Poloz says
- Stephen Poloz's 'headache' sends the Canadian dollar tumbling
- Bill Curry, Shawn McCarthy and Steven Chase: Oliver to take over Finance portfolio from Flaherty
- Tim Kiladze, Tara Perkins and Kevin Carmichael: Flaherty's exit leaves unfinished business
- Globe editorial: A mixed legacy for the Conservatives' only finance minister
- Steven Chase and Bill Curry: Flaherty's decision to leave was made months before, sources say
- Campbell Clark in Politics Insider (for subscribers): Flaherty proved to be a steady hand in an economic crisis
Fed changes signal
The Federal Reserve today dropped the suggestion that higher interest rates would be tied to reaching an unemployment rate of 6.5 per cent, adopting instead a more nuanced description of when the U.S. central bank intends to shift policy that will leave more room to maneuver, Mr. Carmichael writes.
Previously, the Fed’s message to the public was that it wouldn’t think about raising borrowing costs until the unemployment rate fell to something “well past” 6.5 per cent.
The intention was to signal that interest rates would stay low for a very long time. That remains the Fed’s desire, but with the unemployment rate already at 6.7 per cent, it needed to change its communication strategy in order to convince borrowers and investors that interest rates would indeed stay low.
Do you earn more than your house does?
Bank of Montreal’s chief economist poses a question reminiscent of the Toronto housing market’s heyday in the late 1980s: Who makes more, you or your house?
“One quip during the late 1980s housing boom in Toronto was: ‘Last year, my house made more than I did, and it just sat there and did nothing all day,’” Douglas Porter says in a look at real estate prices vs. weekly earnings.
“Well, that was nearly the case for many folks again in 2013.”
Mr. Porter noted that average house prices in the Toronto area rose by some $43,000 last year. Compare that to average weekly earnings in Ontario, which amount to $48,000 a year on an annual basis.
“The old quip still has a bit of a bite of reality,” he said.
Mr. Porter deliberately did not look at Vancouver because of the big difference between average prices and the so-called benchmark value, which is deemed a more representative reading given how those rich homes can skew measures.
That benchmark value was up just 2.1 per cent last year. But if you look at last month alone, just as an example, average prices were up by $86,000. Last year, average earnings in British Columbia came in at $45,600.
As The Globe and Mail’s Brent Jang reports, Vancouver prices soared in February amid a surge in sales.
Just as an example, detached properties hit an average $1.36-million last month, which represents an increase of almost $140,000 over the course of the year.
- Tara Perkins: Home prices to cool with warm weather
- Vancouver, Calgary home prices set records in 'east-west' Canadian divide
- Brent Jang: Vancouver real estate prices break records
- Video: The truth about Canada's housing market
- Tara Perkins: Why the doomsayers are wrong about Canada's housing market
Toyota strikes deal
U.S. officials today unveiled a settlement with Toyota Motor Corp. over the massive recall of vehicles because of unexpected acceleration.
The deal with the U.S. Justice Department topped $1-billion, described by Reuters as the fattest penalty by the U.S. on an auto maker ever.
Toyota thus escapes criminal charges.
“Toyota has co-operated with the U.S. attorney’s office in this matter for more than four years,” spokesperson Julie Hamp told The Wall Street Journal.
“During that time, we have made fundamental changes to become a more responsive and customer-focused organization, and we are committed to continued improvements.”
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