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Economist sees Canadian dollar sinking to 86¢ in 2013 Add to ...

These are stories Report on Business is following Tuesday, June 26, 2012.

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Whither the loonie?
A new forecast from Capital Economics today projects the Canadian dollar will fall to 92 cents (U.S.) by the end of this year and to 86 cents by the end of next.

"The recent depreciation of the Canadian dollar is likely to continue this year and next," said David Madani, the group's Canada economist in Toronto.

"Our reasons for thinking so are the prospects of further declines in commodity prices and lower expectations for interest rate differentials between Canada and the US."

Mr. Madani sees commodity prices sinking further, hit by the ongoing financial crisis in Europe, and that Brent crude will fall to $85 a barrel by the end of 2012.

As well, he cites "lower expectations" for the Bank of Canada hiking its benchmark lending rate from its emergency low of 1 per cent.

"What’s more, if Canadian oil prices decline much further, it is difficult to see how this would not upset the domestic economy, putting even more downward pressure on the Canadian dollar," Mr. Madani said in his report.

Other observers are not so bleak on the loonie's prospects, forecasting it will stay at about parity with the U.S. currency, a shade below or a shade above, well into next year, with some bumps along the way.

Economists at CIBC World Markets today also cited the pressure on the loonie, but believe it could see parity again before the end of the year, and basically hover there.

Breaking parity could depend on the Bank of Canada actually beginning to raise interest interest rates again, they said, though they believe that won't happen and that the benchmark remain where it is right through into 2014.

"While growth in the U.S. is looking increasingly likely to disappoint earlier expectations this year, 2013 may not see any improvement as fi scal restraint takes hold," they added in their report.

"On the domestic side, Canadian consumers, previously buoyed into spending action by low rates, now appear to be suffering fatigue … At the same time the housing boom which has been a key driver of the Canadian recovery is showing signs of petering out … These factors should keep growth tepid next year, below the BoC’s current expectations. As a result, the Canadian dollar should stay close to parity in 2013, but without appreciating too far beyond that mark."

 

Deal in trouble
The massive merger of Glencore International PLC and Xstrata PLC is in danger of falling apart amid opposition to the existing terms by Qatar's sovereign wealth fund, The Financial Times reports.

It's a $65-billion (U.S.) deal that would marry Glencore, the commodities trader, with the miner, but the Qatar fund wants a better deal.

Glencore is bidding 2.8 shares for each Xstrata share, but the sovereign wealth fund, Xstrata's second-biggest shareholder,  is looking for more in the area of 3.25.

 

Three words to define euro zone: Declining, whining and nein-ing
It's getting even uglier in the euro zone, adding to the already tense pressure on European Union leaders as they head toward their summit in Brussels Thursday and Friday.

Divisions run deep, and finger-pointing continues, in what is said to be another crunch week for the 17-member monetary union. At the same time, prospects are sinking.

It's difficult to keep up: A fresh reading today showed Italian shoppers pulling back, Spanish and Italian borrowing costs surged at auctions today, the European Commission is preparing a new plan, and the finance ministers of Germany, France, Italy and Spain are meeting for a pre-summit gathering.

This came a day after Cyprus formally requested a bailout, the fifth member of the euro zone to seek a rescue.

"The country had just days left to recapitalize one of its largest banks, or it risked running out of cash," chief market strategist David Jones of IG Index said of the troubles in Cyprus.

"Although the sums involved, around €10-billion, are relatively small when compared to Spain, it is a sign of how widespread the crisis really is," he said in a research note today.

"Finance ministers from the big four euro zone countries (France, Germany, Italy and Spain) will assemble in Paris today for preliminary talks, and while there might be discussion of tighter EU control of national budgets, reports this morning indicated that there would be no progress on closer fiscal union until the end of this year," he added. "At this rate, there might not be a euro zone left by then."

There are many proposals making the rounds, the latest the plan by the EC, which, like others, is pushing for banking union and a euro bond that would help bring down borrowing costs across the region. But that could take years to see the light of day, and, at any rate, German Chancellor Angela Merkel is steadfast in her opposition to common debt, as well as the so-called banking union that would spread the risks of ailing banks throughout the group. Ms. Merkel has "nein" down pat in her push for fiscal discipline among all 17 countries, as our European correspondent Eric Reguly writes in today's Report on Business.

The new EC plan, a softer version of what was originally envisioned, is made up of four "building blocks" meant to bring Europe under tighter control.

A new financial system: "Such a framework elevates responsibility for supervision to the European level, and provides for common mechanisms to resolve banks and guarantee customer deposits."

  • Budget integration: "An integrated budgetary framework to ensure sound fiscal policy making at the national and European levels, encompassing co-ordination, joint decision-making, greater enforcement and commensurate steps towards common debt issuance. This framework could include also different forms of fiscal solidarity."
  • Growth initiative: An integrated economic policy framework which has sufficient mechanisms to ensure that national and European policies are in place that promote sustainable growth, employment and competitiveness, and are compatible with the smooth functioning of EMU."
  • Accountability: "Ensuring the necessary democratic legitimacy and accountability of decision-making within the EMU, based on the joint exercise of sovereignty for common policies and solidarity."

 

A warning here: That will "have to be put in place" over the next 10 years.

This crisis has spread throughout the region like a virus, leading to sniping among governments, and now goes well beyond the initial trouble spots of Greece, Ireland and Portugal. Spain is the focus - Moody's Investors Service downgraded 28 Spanish banks late yesterday - and Italy is also in the crosshairs. To date, the region's leaders have been unable to halt the contagion.

"The downgrade also reflected concerns that Spanish banks exposure to a deteriorating housing markets, in the face of a deteriorating economy and rising unemployment, would reflect badly on the quality of its loan books, which in turn would mean that they could well need further financial assistance," senior analyst Michael Hewson of CMC Markets said of the move by Moody's.

"The problem facing Spanish banks, which is again being reflected in rising Spanish bond yields, is that no one is clear on how much bailout money Spanish banks will end up needing, despite Spanish Finance Minister Luis de Guindos finally getting around yesterday to finally requesting access to the EU’s offer of €100-billion of loans for its ailing banking sector," he added.

Separately, Greece named a new finance minister today.

 

Court rules on suits
The Ontario Court of Appeal has ruled that two massive class action lawsuits that allege employees of Bank of Nova Scotia and Canadian Imperial Bank of Commerce were unfairly denied overtime pay can go ahead, The Globe and Mail's Jeff Gray reports.

The allegations have not been proven, but the Court of Appeal ruling allows them to proceed as class actions.

 

Barrick names new CFO
Barrick Gold Corp. is bringing back an old hand, taking Ammar Al-Joundi from Agnico Eagle Mines Ltd. to be its chief financial officer.

Mr. Al-Joundi is leaving Agnico-Eagle, returning to the company where he had previously spent 11 years in the finance group.

 

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