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Currency markets toss and turn Currency markets continue to gyrate today, largely on anticipation that the Federal Reserve is poised for a big move to juice the stagnant U.S. economy. The new round of quantitative easing, dubbed QE2 by economists, is expected to be unveiled at the next meeting of the U.S. central bank in November.
While other factors are at play, it is largely a weakening U.S. dollar , which is at 15-year lows against the yen, that is driving other currencies. The Canadian dollar climbed past parity with the greenback this morning before pulling back slightly, and Australia's currency is also flirting with parity for the first time in almost three decades.
Also driving currency markets was a surprise move by Singapore's central bank to widen the trading band for its currency, allowing it to appreciate more amid concerns over inflation.
There has been much talk lately of a "currency war" as countries seek to hold down the value of their money to remain competitive in export markets. China is under particular pressure to allow the yuan to rise, while Japan has intervened in markets to try to stop the ascent of the yen against the greenback.
The ramifications of a weak U.S. dollar are huge - hence the concern. Scotia Capital economists Derek Holt and Gorica Djeric were particularly harsh in their assement today, raising warnings over the potential fallout:
"[Canadian dollar]strength also proves the point that one needn't have [Bank of Canada]tightening to drive the currency. It's being driven by U.S. efforts to export its years of profligacy to its trading partners and blame everyone else in a process engineered through debasement of the greenback. That is also sparking flows out of the [U.S. dollar]into commodities that in turn reinforce strength in commodity related [foreign exchange]crosses like [the Canadian dollar]... The U.S. is fooling itself in believing that such efforts may not come back to bite itself via creating instability in foreign markets via feeding abrupt capital flow swings and imbalances ranging from emerging markets through to Canadian housing and household finances."
CMC Markets analyst Michael Hewson noted last week that "there are fears that the U.S. are devaluing the dollar by a form of benign neglect, and as a result putting pressure on emerging market currencies in the process, as investors go looking for yield. This has created tensions and fears of a possible currency war as emerging market economies take steps to stem the appreciation of their currencies."
U.S. trade gap widens While U.S. trade numbers today aren't as bad as they appear at first blush, a surge in imports from China promises to fuel the controversy over Beijing's currency policy.
Imports from China climbed 6.1 per cent in August, hitting a record $35.3-billion, while the U.S.-China trade gap also set a new high of $28-billion.
The United States and other countries have been pressing China to allow its yuan to appreciate, amid a backdrop of escalating tensions worldwide over foreign exchange rates.
"The widening in the U.S. international trade deficit in August, and in particular the jump in the bilateral trade with China to a record high, will fuel growing fears of a currency war," said Paul Dales, U.S. economist at Capital Economics in Toronto.
"... The rise in the seasonally-unadjusted bilateral trade deficit with China from $25.9-billion to a new record high of $28-billion will only irk Congress further. Even after applying our own seasonal adjustment, August's deficit of $25.5-billion is the second-highest on record even though America's economy is still badly underperforming. Calls for action against China are only likely to get louder."
Part of the reason for the widening overall deficit, though, was related to companies investing in new equipment from overseas. On top of that, U.S. exports are now at their highest in about two years.
Trade deficit narrows Canadian exports to the United States rebounded in August, driving up overall exports and helping to cut what had been a record trade deficit by much more than expected.
Exports to the United States, whose recovery is faltering in a development expected to hit Canada, climbed 2.7 per cent, Statistics Canada said today. Overall exports, to all countries, jumped 3.1 per cent and imports slipped 0.5 per cent. That brought the trade deficit down from July's record $2.6-billion to $1.35-billion.
The trade surplus with the United States, Canada's biggest trading partner, surged to $2.9-billion from $1.5-billion for the first increase since December of 2009.
"While this reversed course slightly in August, a heightened Canadian dollar in tandem with moribund growth in the U.S. mean that net exports are unlikely to become a major source of strength in the near-term," said Toronto-Dominion Bank economist Francis Fong.
Foreclosure scandal widens The U.S. foreclosure scandal continues to grow, casting a pall on the embattled real estate industry.
While several banks have halted foreclosure sales amid allegations that "robo-signers" did a rush job on documents, Wells Fargo & Co. has not, stressing there are no problems with the processes it uses.
The Financial Times reports today that it has reviewed a sworn deposition by one of Wells Fargo's loan documentation officers who says she signed up to 500 related documents a day for the bank, and that all she verified was whether her name, and her title, were correct. Asked if she checked the accuracy of the principal and interest that the mortgage lender claimed was owed, she said "I do not," according to the newspaper.
The woman was deposed in March as part of a lawsuit in Florida. Wells Fargo would not comment on the officer's deposition but said its affidavits are accurate.
Separately today, The Wall Street Journal raises questions about the roles of Fannie Mae and Freddie Mac, which are government owned and are going back over the work of a law firm they recommended to process evictions.
The two companies do not directly service loans but do use what the Journal referred to as foreclosure mills, law firms whose specialty is processing foreclosures.
Questions over reports of improper documentation in foreclosures have led to moratoriums on foreclosure sales by some lenders, and, yesterday, a co-ordinated probe by the attorneys general of all 50 states. The scandal could affect millions of Americans and cost billions of dollars because of the delay in sales.
Strikes hit French refining Social unrest is again taking its toll in Europe. Reports from France today say strikes across the country have sidelined oil refining, with just one of 12 operations functioning. French workers are protesting the government's pension reform measures, which include raising the official retirement age. Protests also continued in Greece today.
A tale of two jobless rates Quebec's unemployment rate has retreated at a much faster pace than Ontario's and sits almost at pre-recession levels, BMO Nesbitt Burns notes. Ontario's jobless level has "drifted down" to 8.8 per cent in the last year while Quebec's has declined to 7.7 per cent.
"That relative outperformance is also reflected in trends among Canada's two largest cities - Montreal's jobless rate is now decisively and consistently below that of Toronto for the first time in more than two decades of data (and likely going back much further than that," Mr. Porter wrote.
"Both cities have jobless rates above the national average (Montreal is at 8.5 per cent, and Toronto is now at 9.2 per cent versus Canada's 8 per cent. But Montreal is well below its long-run average in a clear reversal of fortune."
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