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The Week

Currency war (that isn't a war) to rage 2 more years Add to ...

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The currency war that isn't
Some call it a currency war, others a currency cold war. Still others, mostly those who are allegedly involved, say it's no war at all.

Whatever it is, it got a bit hotter this week. And it's going to last for another two years, according to Société Générale.

This has been playing out for a while as central banks such as the Federal Reserve engage in stimulus programs that are aimed at boosting economies but happen to be negative for their currencies. G20 finance ministers and central bankers, of course, have pledged to refrain from an all-out currency war.

Still, China, an odd one to be levelling such allegations, this week warned Japan about competitive devaluation of its yen, which has weakened in response to monetary plans.

“Currency wars are neither novel nor should they be unexpected in the current economic environment,” said Kit Juckes, the chief of foreign exchange at Société Générale.

“Countries that broke from the gold standard in the 1930s devalued their currencies significantly, and recovered from the Great Depression quicker than countries that stayed with the gold peg,” he said in a report Friday.

“Our stylized G10 currency wars scorecard ranks JPY, USD and CHF as the most likely combatants in the currency wars, with CAD and AUD being the least,” he added, referring to the yen, the U.S. dollar, the Swiss franc and the Canadian and Australian dollars by their symbols.

“But this uses static backward-looking data. Given our economics research view that the U.S. will lead the G10 economic recovery, we also expect expectations of a Fed exit to rise and buoy the USD over the year.”

Société Générale  believes “that the currency wars will escalate further over the next two years as economic malaise in the developed countries persist, but ultimately the return of growth will end the wars without lasting damage to the global economic system.”

Economists Craig Alexander and Francis Fong of Toronto-Dominion Bank don’t see it as a true currency war, citing the direct devaluation and outright protectionist moves of the 1930s.

They do, however, see trouble for Canada from what they call a “currency cold war.”

The Bank of Canada has not had to resort to the quantitative easing, or asset-buying, plans of other central banks. This, the TD economists said, may have played a role in the overvaluation of the loonie, as the dollar is known in Canada.

Of late, the loonie has slipped, but not to a level where it is deemed to be “fairly valued” on a purchasing power parity basis, about 91 cents U.S.

Can I offer you 10 basis points?
Potential homebuyers may be thanking Bank of Montreal for its new 2.99 per cent mortgage. But Finance Minister Jim Flaherty isn't. In fact, he's thanking BMO's competitors for not matching.

This all began last weekend when BMO cut its five-year, fixed-rate mortgage from 3.09 per cent, sparking concern among politicians from all parties.

Mr. Flaherty, in particular, has been fighting a housing bubble and trying to tame the appetite for debt among Canadian consumers. His last round of mortgage restrictions, brought in last summer, has cooled things off rapidly. Credit growth has slowed, and home sales have plunged.

As The Globe and Mail's Bill Curry reports, Mr. Flaherty didn't take kindly to BMO's move, saying Friday that he expressed his concerns to BMO while praising its rivals who didn't match the cut.

"We've seen some moderation in the housing market, which I think is a good thing," the Finance Minister said.

"As you know, we've tightened up the mortgage insurance rules four times over the recent years, so I thank those Canadian financial institutions that have not chosen to reduce their rates further."

Interesting, too, that this should come in the same week that saw the Bank of Canada effectively declare that policy makers have been winning the battle against a housing bubble.

With a 25-year amortization period, BMO's new rate would see monthly payments of $2,363.66 on a $500,000 mortgage, compared to $2,389.38 at 3.09 per cent. Over five years, the savings for the borrower in interest would be $2,361.75.

Hey, thanks.

Economy gets a bit of a boost
Canada's economy is suddenly showing a bit of spunk.

Economic readings this week, from trade to construction to jobs, have been better than expected, following on the heels of a fourth-quarter stall.

Nowhere was this more evident than in Friday's report from Statistics Canada, which, as The Globe and Mail's Tavia Grant reports, showed the economy created a surprising 51,000 jobs in February.

The jobless rate held at 7 per cent, however, as more people went searching for work, and thus were counted in Statistics Canada's survey.

"The strong February employment gain does provide further reason for optimism that GDP growth should bounce back in the current quarter from disappointing gains of around 0.5 per cent that prevailed over the second half of last year," said assistant chief economist Paul Ferley of Royal Bank of Canada.

"This adds to the optimism provided by the stronger-than-expected January trade report released Thursday that points to Q1 net exports providing an even greater add to growth relative to the last quarter," he said in a research note.

Markets rally
Global markets rallied this week, with the Dow Jones industrial average reaching new heights as some economic signals picked up.

The S&P 500 climbed 2.2 per cent as bank stocks rose, though, noted senior economist Robert Kavcic of BMO Nesbitt Burns, Toronto's S&P/TSX composite climbed just 0.5 per cent.

"No surprise here, but Canadian stocks continue to trail those in the U.S., up 2.9 per cent on the year versus the 8.5-per-cent pop south of the border," he said.

Required reading
The North Pole stands to become a viable international shipping route for some vessels in coming decades as melting ice clears the way for cargo movement through corridors never before considered possible, Nathan VanderKlippe writes.

Target Corp. opened three Ontario stores this week. Our retail reporter, Marina Strauss, gave readers a sneak peek.

While Canada earns plaudits for its stability, investors should beware, Scott Barlow writes. The S&P/TSX can swing just as violently as an emerging market.

Richard Branson, the outspoken founder of Virgin Group, waded into the debate over allowing employees to work from home, calling mandatory office hours for all workers a sign of "old school thinking." Omar El Akkad reports.

Prince al-Waleed Bin Talal, one of the richest men in the world, has a bone to pick with Forbes because the magazine doesn't think he's as rich as he does, Sean Silcoff writes in ROB Insight (subscribers only).

Hudson's Bay Co. is rebranding the company and its store logos, losing the big B that everyone knows so well, Susan Krashinsky reports.

Bombardier took a step this week toward an all-out fight with Airbus and Boeing, unveiling a version of its new C Series plan that increases the number of seats to 160, Greg Keenan reports.

Follow on Twitter: @michaelbabad

 

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