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Canadian dollar on 'full-fledged secular bull run'

These are some stories The Globe and Mail followed this week.

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Loonie on 'bull run'
The Canadian dollar almost made it back to parity this week, but pulled back Friday amid a general malaise in the markets.

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Still, says economist David Rosenberg, the currency is in its heyday.

"Indeed, once again, the story for the Canadian dollar in the recent crossfire was how well it held up - bottoming at 96 cents this time around, compared with 95 cents in 2011, 93 cents in 2010 and 77 cents in 2009," says the chief economist at Gluskin Sheff + Associates.

"You know what 'higher lows' means technically, don't you? The loonie is in a full-fledged secular bull run, notwithstanding the fact that in recent times it has settled into a trading range. Of the two countries, Canada and the U.S., it is the former that is not confronting a bitter election campaign, piercing of the debt ceiling and a fiscal cliff to fall off in 2013."

Commodity prices are, of course, helping to drive the dollar. But there's much more behind its strength, notes Douglas Porter, deputy chief economist at BMO Nesbitt Burns.

Mr. Porter says the loonie appears to be trading about 10 per cent above commodity price fundamentals, and that the reasons are clear: "Canada's strong fundamentals have been a magnet for capital inflows."

Indeed, Statistics Canada this week reported a record inflow of foreign money into Canadian securities in May, notably Canadian government bonds.

"The recent Dutch debate tempest clouded the fact that there is more than commodities driving the Canadian dollar," Mr. Porter said.

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U.S. drought devastates
The threat of another food crisis hangs over the world amid a devastating drought, said to be the worst in some 50 years, that has destroyed crops across the U.S. Midwest.

Corn and soybean prices hit record levels with no signs of rain to ease the trouble.

"Each day is taking us past the point of any hope for a large and growing number of corn farmers in Iowa, Illinois and Indiana," warned Dennis Gartman, publisher of the Gartman Letter.

"The crop has gone from 14.7 billion bushels only a few weeks ago to the very low 12s and may eventually settle to a crop in the high 11-billion bushel range," he said in a research note.

"We do not wish to sound too frightened by what has happened in the Midwest, but this is clearly the worst drought in 50+ years and there seems to be no prospect of its ending."

The drought is now widespread, and there are few signs of relief.

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"Fully 70 per cent of the Midwest is now judged to be in some stage of drought, with the dry spell spreading west to Nebraska and Iowa more recently," said deputy chief economist Douglas Porter of BMO Nesbitt Burns.

"With the nine-state region producing three-quarters of the U.S. corn and soybean crop, and many other regions in the U.S. facing drought conditions, grain prices have skyrocketed in the past month. Corn hit an all-time high this week at $8.16 a bushel, up 55 per cent in little more than a month, while soybeans have jumped almost 30 per cent to a record $17.67. Wheat prices have also surged 50 per cent since mid-June, as the drought is now threatening the Plains as well."

The drought promises to drive up food prices into next year, which would ripple through the economy.

"Corn has soared as crop estimates plunged for a drought-plagued U.S., but the resulting food inflation will sap much needed consumer spending power," said chief economist Avery Shenfeld of CIBC World Markets.

It takes time for such increases to feed into consumer prices, but the U.S. agriculture secretary said he expects that to happen into 2013.

"There is normally about a 6-9 month delay between changes in crop prices and the full impact on grocery prices, so look for this spike to weigh most heavily around the turn of the year," said Mr. Porter.

Libor change afoot
The scandal over rigging the benchmark interest rate known as Libor escalated this week as more details came to light after the earlier settlement struck with regulators by Barclays Bank PLC.

Now, the world's central bankers are looking at overhauling the London interbank offered rate amid a probe that has taken in some of the world's biggest banks.

The Bank of England, the Federal Reserve and others such as the Bank of Canada are looking at changing the process, and will meet in early September to discuss it.

Canada's Mark Carney is also playing  a central role, as head of the global Financial Stability Board, and is discussing with his counterparts how to reform the process.

"Public authorities have to play the lead in determining what next with Libor and if not Libor, what else and how to manage that transition, because there has to be absolute confidence in this," Mr. Carney said this week in Ottawa.

"If Libor cannot be fixed, if it's structurally flawed and cannot be fixed - which is a possibility - there may need to be different types of approaches and we need to think that through."

What to watch for next week
Markets will get a sense next week of how the U.S. and British economies are performing, and neither reports will be strong.

Indeed, a report on Wednesday is expected to show that Britain's economy contracted in the second quarter by 0.2 per cent.

A similar report in the United States, on Friday, won't be that bad, but is expected to show only slim growth for the second quarter.

"Top-line 2Q GDP should come in at 1.5 per cent, solidifying our long-held belief that first half growth would be rather modest," said RBC Dominion Securities.

"This is largely owing to a consumer which not only pulled forward activity on the heels of a warm winter, but lost considerable momentum in the face of poor fundamentals (i.e. weak earnings … Perhaps most concerning is this loss of momentum occurs just as the economy is set to face a string of headwinds - the fiscal cliff, potential U.S. downgrade, elections - that we believe will conspire to place downward pressure on economic output in the second half of the year."

At home, Statistics Canada's report on retail sales in May is expected to show a little spring in the step of the consumer, with sales rising about 0.5 per cent in a rebound from April. But that will be driven by car buyers. If you strip out auto sales, overall retail trade is expected to come in fairly flat.

"While underlying prospects for consumers should remain weak due to slow growth and weaker credit accumulation, May retail sales may have actually sprung back to life," said Emanuella Enenajor of CIBC World Markets.

"A 0.5-per-cent gain in retailers' receipts were entirely driven by rising vehicle sales, as the ex-autos print could come in flat. While gains in building equipment/materials sales were likely seen with favourable weather, gasoline station sales probably dropped, on falling pump prices."

For investors, there's a lot to digest as second-quarter earnings season kicks into even higher gear and Canadian results begin to flood in.

Among companies scheduled to report quarterly results next week are Hyundai Motor Co., Samsung Electronics Co., United Parcel Service Inc., ArcelorMittal, Avon Products Inc., Cenovus Energy Inc., Daimler AG, Peugeot SA, Inc., Barrick Gold Corp., Canfor Corp., Colgate-Palmolive Co., Exxon Mobil Corp., Facebook Inc., Goldcorp Inc., Imperial Oil Ltd., Potash Corp., Starbucks Corp., Barclays PLC, Celestica Inc., Domtar Corp., Renault SA and Total SA.

"While bottom-line results have topped expectations, top-line revenues have curiously fallen short at a notably high rate," Robert Kavcic of BMO Nesbitt Burns said of earnings so far.

"Fifty-eight per cent of S&P 500 companies have actually missed revenue expectations amid softer global economic growth and unfavourable currency adjustments, hanging a cloud over the early-season earnings results."

Required reading this week
Microsoft Corp., which defined and dominated the technology sector for the past three decades, has been humbled, becoming one tech firm among many, Iain Marlow writes. The software giant reported its first quarterly loss as a public company. The loss was expected, driven by a hefty writedown, and Microsoft's days of easy dominance are long gone, but the red ink - coming on the same day as Google Inc. reported buoyant revenue - underscores the magnitude of the change.

The fast-shifting department-store landscape is getting another jolt from a U.S. retailer, Marina Strauss reports. Nordstrom Inc. of Seattle is finalizing its plan to set up shop here in four locations, including three top sites that Sears Canada Inc. is abandoning this fall.

The Bank of Canada is adding the downward drift in prices for oil and other commodities to its catalogue of threats to economic growth, Jeremy Torobin reports.

Toronto's booming housing market is enticing more sellers to list their homes, but the flood of new listings is not dampening prices, Ora Morison writes. But in Vancouver, new sellers are increasingly scarce, as prices in the once-overheated market show signs of weakness.

Jim Flaherty's plan to overhaul the banking industry's dispute-settlement regime as looks suspiciously like a gift to the country's big banks, which have chafed under the current regime, Barrie McKenna says.

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