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‘Rock-solid’ Canadian dollar seen strong for at least two more years Add to ...

These are stories Report on Business is following Thursday, Jan. 10, 2013.

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Canadian dollar seen continuing strong
It may be deemed overvalued by some observers, but the Canadian dollar nonetheless is expected to remain strong for at least the next couple of years.

Indeed, economist David Rosenberg believes the “rock-solid currency” will take off again when China picks up and commodity prices climb in tandem. That's not particularly good news for Canadian exporters hoping for some relief from a strong currency that hurts their sales.

The International Monetary Fund believes the loonie, as it’s known in Canada, is overvalued by anywhere between 5 per cent and 15 per cent, or well beyond where the economic fundamentals put it.

But it’s being propped up by foreign investors flooding into Canada, which is one of just seven countries in the world with a triple-A rating.

“Another flare-up of U.S. fiscal concerns could be the catalyst for a slightly weaker-than-parity move, but it should prove temporary,” said senior economists Michael Gregory and Benjamin Reitzes of BMO Nesbitt Burns, who, like some other forecasts, see the loonie running above parity with the U.S. and ending next year in the range of $1.04 (U.S.).

“With the kind of economic outcome that would make the Bank of Canada comfortable about raising rates now seemingly hinging on U.S. prospects, we look for the loonie to firm as U.S. growth improves.”

Some economists expect no rate hike by the Bank of Canada until next year, but others see an increase in its benchmark overnight rate sooner, which helps support the dollar given the difference between the Canadian and U.S. central banks.

While the Bank of Canada appears in no rush to boost the rate from its current 1 per cent, it has said the next move will be up, not down. Compare that to the Federal Reserve, whose key rate is near zero and which has pledged to hold it there until the U.S. jobless rate eases to 6.5 per cent.

Like the loonie, other commodity-based currencies, such as the Australian dollar, have also benefited from commodity prices. And quantitative easing, the Fed’s asset-buying program known as QE, acts to weaken the U.S. dollar.

“The Canadian dollar remains a rock-solid currency as it continues to trade above par against the greenback,” said Mr. Rosenberg, the chief economist at Gluskin Sheff + Associates.

“Imagine what it will do once China does re-accelerate, which it will, and sends commodity prices back on a decisive uptrend.”

Indeed, China's latest numbers sent commodities higher today, and the Canadian dollar rose along with other currencies.

Foreign money has been flooding into Canadian assets, and this is expected to continue.

“I never thought how the combination of Obama and Bernanke would play into the equation as well, but consider that since the president was first elected with his policies of addressing income and wealth distribution (as opposed to creation) and the onset of all the Fed-induced QEs, in 2009, that American investors have plowed more than $300-billion into Canadian portfolio securities – bonds, stocks and money market (about $60-billion through the first 10 months of 2012 too),” Mr. Rosenberg said.

“In other words, in less than four years, U.S. residents have invested more in Canadian markets than they did in the prior 14 years combined.”

Macklem takes dimmer view
The Bank of Canada is looking past surprisingly strong jobs growth at the end of 2012 and downgrading its short-term outlook for the economy because exports continue to languish, The Globe and Mail's Kevin Carmichael reports.

Speaking at Queen's University in Kingston, Ont., today, Tiff Macklem, the central bank's senior deputy governor, said "near-term momentum appears to be slightly softer than previously anticipated."

The Bank of Canada's No. 2 official said policy makers still anticipate that growth will pick up over the course of the year.

ECB stands pat
European Central Bank chief Mario Draghi expects the beginning of a “gradual recovery” later this year. So much so that he’s not doing much of anything.

The central bank today held its benchmark rate steady at 0.75 per cent, citing challenges in the euro zone, whose economy continues to falter and where unemployment is running at 11.8 per cent.

“However, more recently several conjunctural indicators have broadly stabilized, albeit at low levels, and financial market confidence has improved significantly,” Mr. Draghi told reports after the ECB meeting.

“Later in 2013 a gradual recovery should start, as our accommodative monetary policy stance, the significant improvement in financial market confidence and reduced fragmentation work their way through to private domestic expenditure, and a strengthening of foreign demand should support export growth.”

Indeed, Spain today pulled off a solid debt auction, and there’s no question that the euro crisis has calmed in the last several months.

“Super Mario sounded like a man who thinks the job is done, battle won, time to rest,” Kit Juckes, the chief of foreign exchange at Société Générale, said on Twitter, referring to Mr. Draghi’s nickname among some, based on the video game.

“Superhero departs, leaving unemployed to politicians.”

Mr. Draghi, while pointing to better times ahead, still noted, however, that the euro zone is in recession and that economic indicators are weak for now.

Mr. Juckes has an interesting take on the 17-member euro zone, noting how the “whole market is patting itself on the back” after Spain’s auction pushed down yields.

“Really low bond yields and a strong currency despite a huge debt burden, sizeable budget deficit and chronic economic weakness,” he said in a research note before the ECB decision.

“Yup, the Japanification of the euro zone continues apace.”

As BMO's Mr. Reitzes noted, the central bank today was “more hawkish than expected,” giving no signal of cutting rates despite the troubles in the monetary union.

“It appears the ECB is heartened by the recent better confidence reports and will need to see a renewed downturn in the data before they’re prepared to provide further accommodation.”

Chinese exports climb
China's trade numbers today say a lot about the state of global economies.

Exports surged 14.1 per cent in December from a year earlier, while imports rose 6 per cent, bringing its trade surplus to $31.6-billion (U.S.), Carolynne Wheeler reports from Beijing.

What's notable here is the breakdown: Chinese exports were strong in North America and Asia, except for Japan, while soft in the euro zone, adding to "recent signs that the U.S. and Asia are showing promise of a sustained recovery," said senior analyst Michael Hewson of CMC Markets in London.

The resolution of a port strike in California last month may have helped, added Benjamin Reitzes of BMO Nesbitt Burns. And while the gain in imports was the best in six months, it was still "subdued," he said.

"If China is shifting gears toward more domestic consumption-based growth, imports will need to pick up in 2013."

Ford hikes dividend
Ford Motor Co. has doubled its quarterly dividend to 10 cents (U.S.) a share, bringing the payout to its highest level in seven years.

“Our ability to double our dividend in one year is a testament to our One Ford plan, which has enabled us to maintain a solid balance sheet, while at the same time growing our business to provide our shareholders with more return on their investments,” said chief financial officer Bob Shanks.

Building permits sink
One should never read too much into building permits, given their volatility month to month, but they plunged in November by 17.9 per cent to their lowest since last January.

That more than reverses the 15.9-per-cent gain in October, Statistics Canada said today.

Today’s numbers come on the heels of a drop in construction starts.

The over all value of permits issued by Canada’s municipalities was driven down by largely by Ontario.

"Today’s data add to concerns that Canada’s homebuilding sector is entering a phase of weakening, following a long run of contributing to economic growth," said Emanuella Enenajor of CIBC World Markets.

Still, it’s worth noting that, according to the federal agency, the total value of permits issued in the first 11 months of last year topped the pre-recession peak of almost $75-billion during all of 2007.

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