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‘Fair value model’ pegs Canadian dollar at 98.73¢ (So where did 3.5¢ go?) Add to ...

These are stories Report on Business is following Wednesday, July 3, 2013.

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Fair value
David Rosenberg, of late the cheerleader for the Canadian dollar, says the “fair value model” pegs the currency at 98.73 cents.

That’s about 3.5 pennies above where it’s now trading, according to research by the chief economist at Gluskin Sheff + Associates.

Mr. Rosenberg said he recently updated the measure, which is based on a Bank of Canada paper published in August 2006, and found the fair value for the loonie, as the dollar coin is known, is well above the spot rate.

“In other words, the Canadian dollar has so much ‘bad news’ priced in that commodity prices would have to plunge an additional 25 per cent from here just to realign the currency with the underlying fundamentals,” Mr. Rosenberg said in a research note today.

“Note that the spot rate is already more than two standard deviations away from the model-estimated value, which statistically occurs only less than 5 per cent of the time.”

Projections for the loonie have been all over the place, though many forecasters expect it to sink, some to as low as 90 cents, having lost about 6 per cent so far this year.

It has been bounced around largely by outside factors related to plans by the Federal Reserve to cut back on stimulus measures, possibly in the fall, and economic measures in China.

Euro crisis returns
Europe’s crisis is roaring back, this time on mounting political instability.

European stocks tumbled, and some bond yields spiked, as Portugal’s government was rocked by resignations amid harsh austerity measures, The Globe and Mail's Eric Reguly reports. Greek troubles also hit the markets.

“Portugal had, until now, succeeded in keeping out of the limelight, quietly getting on with tough reforms while everyone fretted about the bigger worries of Spain and Italy,” said IG’s Mr. Madden.

“Markets don’t like to return to problems they thought had been solved, but the slow-motion disintegration of the Portuguese coalition and the alarming spike in bond yields shows that the medicine of austerity is still a very tough pill to swallow.”

Ironically, the political troubles mount just as the embattled euro zone shows signs of beginning to return to some semblance of economic stability.

European Commission chief José Manuel Barroso warned of the potential for greater trouble.

“The initial reaction of the markets shows the obvious risk that the financial credibility recently built up by Portugal could be jeopardized by the current political instability,” he said.

“If this happens it would be especially damaging for the Portuguese people, particularly as there were already preliminary signs of economic recovery,” he added in a statement.

“This delicate situation requires a great sense of responsibility from all political forces and leaders.”

Oil spikes
Oil prices shot up above $100 (U.S.) a barrel today, fuelled by the escalating crisis in Egypt and a new report on U.S. stockpiles of crude.

Also notable was the narrowing in the price difference, to less than $4, between the U.S. benchmark, West Texas Intermediate, and Brent crude.

WTI hit its highest levels since last May.

The market has been spooked by the mounting unrest in Egypt, amid fears that the troubles could disrupt shipments through the key Suez Canal.

“Egypt, while not an exporter of oil, bears close proximity to the Suez Canal, and this, along with the ongoing civil war in Syria, is raising concerns about the spreading of instability to oil-producing nations,” said senior market strategist Brenda Kelly of IG in London.

“The report from the Energy Information Administration (EIA) today, which showed a fall in inventories of 10.3 million barrels, will likely help cement the case for higher oil prices in the medium term.”

Senior analyst Michael Hewson of CMC Markets in London questioned the spike in oil prices.

“Concerns about oil supply disruptions due to the unrest in Egypt may be overstated given that the Suez Canal has seldom been disrupted by previous upheaval; however that hasn’t stopped oil prices edging higher for that very reason,” Mr. Hewson said.

“What is harder to fathom is why U.S. prices are rising faster than Brent prices, even if you factor in concerns about lower inventories at U.S. refineries, which was confirmed … with a draw of 10.3 million barrels, well above expectations of a 2.2 million-barrel drop.”

High voltage
Britain’s energy regulator is anything but mellow today, announcing a crackdown on the theft of electricity, particularly among pot farms.

It may sound funny, but it’s costing hundreds of millions a year.

“Ofgem wants to make sure that consumers are paying no more than they need to for their electricity, and lives are not put at risk,” Andrew Wright, the regulator’s chief, said today.

“It’s critical that suppliers do all they can to clamp down on electricity theft,” he said in a statement.

“This is why Ofgem is introducing new rules to encourage better theft detection.”

Ofgem said there are up to 25,000 cases of theft a year – those are the ones that are detected – that cost consumers at least £200-million. That’s £7 per customer.

And, the energy companies say, up to one-third of the electricity stolen is used to power marijuana farming operations.

Ofgen unveiled new rules that would force the energy suppliers to act or face penalties. Among the proposals:

  • Suppliers would form a “national theft risk assessment service” to target those who are stealing.
  • They would also strike a code to supervise how investigations are done.
  • Companies would co-ordinate efforts where pot farms are concerned with the Home Office and local police.
  • Best practices would be shared among the suppliers.
  • Ofgem also wants a 24-hour snitch line.

(The proposals hardly seem onerous, so maybe the regulator is a bit relaxed, after all.)

RIM tumbles
Shares of Research In Motion Ltd. sank again today, continuing a decline that began with last week’s earnings report as investors seemingly reject the BlackBerry maker’s call for patience.

Shares of RIM, which has rebranded itself as BlackBerry but whose legal name remains Research In Motion, was down just slightly by early afternoon, recovering somewhat from earlier losses.

That follows yesterday decline on Nasdaq of 5.7 per cent.

RIM’s latest  troubles began last Friday when the Canadian company posted a first-quarter loss of $84-million (U.S.), or 16 cents a share, also reporting a jump in revenue but weaker-than-expected sales of its new BlackBerry 10 devices.

That led to a plunge in its stock price of almost 28 per cent on Friday alone as RIM also forecast an operating loss for the second quarter, saying that the smartphone market “remains highly competitive, making it difficult to estimate units, revenue and levels of profitability.”

RIM had been buoyed by strong reviews for the new devices, but that failed to spark the level of sales expected by analysts.

Competition in the industry is fierce against the likes of Apple Inc.’s iPhone, Samsung’s Galaxy and devices powered by Google Inc.’s Android operating system.

When he unveiled the earnings results on Friday, chief executive officer Thorsten Heins suggested shareholders be patient as the new BB10 phones are just a few months old.

Analysts have certainly shown no such patience, downgrading RIM stock as the shares sank.

Just yesterday, for example, CIBC World Markets analyst Todd Coupland cut his price target on the stock to $14 from $20, while Raymond James analyst Steven Li cited the fact that RIM earnings “missed on every key metric,” saying he’s concerned.

“We remain concerned around the lack of sell-through for BB10, the level of decline in services revenue, and now also cash burn as we are back to forecasting operating losses,” Mr. Li said in a research note.

“While some of BBRY’s assets (enterprise/services) could surface additional value in a transaction, we balance that with the potential for further deterioration in fundamentals in the meantime especially if sell-through does not improve (lower gross margins, more cash burn, potential inventory writedowns),” he added, referring to RIM by its U.S. stock symbol.

Trade deficit shrinks
Canada’s trade deficit narrowed in May to $303-million as a decline in imports outpaced a drop in exports.

The shrinking deficit may be good news, but the erosion of trade certainly isn’t.

Export volumes fell 0.7 per cent and prices 1 per cent, leading to an overall decline of 1.6 per cent, Statistics Canada said today.

That was less than the 3.2-per-cent drop in imports, whose prices slipped 1.2 per cent and volumes 2 per cent.

Exports of minerals and autos led the export decline.

Exports to the United States, Canada’s biggest trading partner, slipped 1.6 per cent, but that, too, was less than the 2-per-cent drop in U.S. imports to Canada.

Exports to other countries fell 1.6 per cent.

“While the headline trade figure may have been a pleasant surprise, the detail was less encouraging with two-way trade declining,” said Emanuella Enenajor of CIBC World Markets.

Carriers to launch challenge
Some wireless carriers are planning to challenge parts of the federal telecom regulator’s new wireless code.

BCE Inc., Rogers Communications Inc., Telus Corp., SaskTel and MTS are among a group of carriers that is poised to file a motion with the Federal Court of Appeal, as early as today, seeking leave to appeal from certain facets of the CRTC’s wireless code, The Globe and Mail's Rita Trichur and Steve Ladurantaye report.

Specifically, the carriers appear to take issue with measures that give the code “retrospective application” to wireless contracts signed before the code is due to come into force, according to a notice of motion and other legal documents.

Carney’s choice
Mark Carney is wasting little time in dealing with a mounting controversy in Britain over the images on the country’s banknotes.

Some Britons have been up in arms over the Bank of England’s decision in April to swap the image of social reformer Elizabeth Fry with that of Winston Churchill on the £5 note starting in 2016.

With the exception of the Queen, that would mean Britain’s money would carry no image of a woman. The only other woman pictured on a banknote was Florence Nightingale, who was on the £10 note until the mid-1990s.

Mr. Carney, who only started his job as central bank governor, faces a huge online campaign and petition.

On his first day, Mr. Carney received a letter from MP Mary Macleod, who chairs a parliamentary women’s group.

She wasn’t complaining about Sir Winston, but rather the fact that the “symbolism of having no women on our bank notes leaves a chasm where there once was inspiration,” according to the letter to the former Bank of Canada chief.

“What irony it is that on the very notes that we earn and spend, we will now see no women at all,” she told Mr. Carney.

“This is completely unrepresentative of the role that women have played and continue to play in our country's history.

Women of outstanding achievement such as Rosalind Franklin, who contributed to the discovery of DNA; Emmeline Pankhurst, the figurehead of female suffrage; and National Trust founder and campaigner against poverty Octavia Hill, are all surely more than worthy contenders.”

Mr. Carney responded in a letter today, pledging to discuss the issue and announce a decision by the end of this month.

“I fully recognize that, with Sir Winston replacing Elizabeth Fry as the character on the £5 note - in the absence of any other changes to the Bank of England's notes - none of the four characters on our notes would be a woman,” Mr. Carney said.

“That is not the bank's intention,” he added in the letter posted on the central bank’s website.

“I therefore understand fully the concern that has been raised by you, and many others, about the potential absence of a female character on the series of four Bank of England notes. I believe that our notes should celebrate the diversity of great British historical figures and their contributions in a wide range of fields.”

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