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Canadian dollar showing signs of 'valuation fatigue'

These are stories Report on Business is following Tuesday, Feb. 12, 2013.

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Whither the loonie
Société Générale believes the Canadian and Australian dollars are displaying evidence of "valuation fatigue."

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As is the credit market.

The report from Kit Juckes, Sébastien Galy and Olivier Korber came today amid general concern over foreign exchange rates and chatter about a currency war, with a pledge from G7 nations to avoid such competitive devaluation of their money. At the same time, finance ministers from the European Union are meeting in Brussels today, and the level of the euro is sure to be an issue.

Over all, the currency market has returned to "business as usual," the Société Générale foreign exchange team said in their report.

"European finance ministers are not going to undermine the euro and the G7 has resisted the temptation to try and stop the yen's decline and issued a bland call for market-determined [foreign exchange] rates instead," they said.

But while it's business as usual, the credit market has "run out of puff," they added.

"This has coincided with a slightly stronger U.S. dollar against the Mexican peso and a rather bigger appreciation relative to the Australian and Canadian dollars," they said in a report.

"Credit, CAD, and AUD are all showing signs of valuation fatigue," they added, referring to the Canadian and Aussie dollars by their symbols.

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What they mean by "valuation fatigue," explained Mr. Galy, is the "inability to buy more of something that is very expensive," citing a credit analyst who "made the parallel with a plane that is flying too high and starting to lose traction becoming more unstable."

This came as finance ministers and central bank chiefs said their actions on the monetary and fiscal policy fronts will be aimed at bolstering their economies, not driving down the value of their currencies.

Aggressive easing measures by central banks can and have moved exchange rates, which can help economies by lowering their export prices and, thus, helping their manufacturers.

What the G7 is saying is that this is a by-product, rather than a goal, on the long, hard road back to a sustained economic recovery.

The Federal Reserve's quantitative easing, for example, an asset-buying program, is negative for the U.S. dollar, but is aimed at juicing the economy, not driving down the greenback.

"We, the G7 ministers and governors, reaffirm our longstanding commitment to market determined exchange rates and to consult close in regard to actions in foreign exchange markets," the group said in statements posted on individual central bank websites.

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"We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates," they said in the statement.

"We are agreed that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability."

As The Globe and Mail's Kevin Carmichael reports, pressure has been growing on policy makers in advance of a meeting of G20 finance officials later this week in Moscow.

Talk of a currency war has mounted after efforts by Japan to bolster its economy, which in turn helped weaken the yen, and comments by France's Francois Hollande on the strength of the euro amid the region's recession.

"They're pledging that their monetary policies are aimed at economic growth, and are not aimed at currencies," senior currency strategist Camilla Sutton of Bank of Nova Scotia said in an interview, noting the "fine line" between countries engaging in a currency war and the fallout on currencies from other actions.

"This distinction is important as if monetary policy's intended outcome is to weaken the currency for economic gain it would be considered part of a currency war; however if monetary policy's goal is to improve the domestic economic environment and the by-product is a weaker currency than it is far more globally acceptable," she added later in a report.

She added, however, that some advanced countries, notably Switzerland, have in fact targeted their currencies. Japan has suggested it's moving toward such action, but hasn't done it, she added, while Mr. Hollande has less control of a currency shared by 17 countries.

"The statement suggests that asset purchase programs should use only domestic instruments," Ms. Sutton said.

"Accordingly if Japan is to adhere to the statement they would not be able to enlarge their asset-purchase program to include the buying of foreign bonds (a strategy of some of the BoJ governor candidates); a policy that would be weaken [the yen] further."

Ms. Sutton's colleagues at Scotiabank, Derek Holt and Dov Zigler, described the G7 statement as "toothless," though they don't believe a currency war is afoot.

"If they are so inclined to target exchange rates through whatever means they will do so and simply couch it in the context of pursuing other goals like stimulating their financial systems or addressing bond market stresses," they said in a separate research note.

"Pious statements of intent serve limited purpose. Further, statements like these are always toothless tigers in that the scope for punishing each other in the event that it can be proven that a country is attempting to manipulate its currency is rather limited in practice."

Barclays in overhaul
The new CEO of Barclays Bank PLC CEO summed it all up in three words today: "We get it."

Unfortunately for thousands of Barclays employees, getting it also means getting the axe.

As The Globe and Mail's Paul Waldie reports from London, Antony Jenkins said the world of banking has "changed fundamentally," and banks must do well financially but also behave.

Banks that don't change will be left behind, and those who believe they can wait out the current issues are wrong, he said in a speech.

Barclays, of course, was the first bank to settle in the global Libor probe.

Mr. Jenkins also unveiled 3,700 job cuts, the shutdown of the Barclays tax-planning business and lower pay for bankers.

Nexen deal gets go-ahead
U.S. regulators have approved the takeover of Canada's Nexen Inc. by China's CNOOC Ltd., meaning the $15.1-billion (U.S.) deal now has the final go-ahead.

The deadline to close the deal had been extended as the Canadian energy giant awaited the U.S. decision.

The Committee on Foreign Investment in the United States has now given the green light, Nexen said today, and the deal will close in the week of Feb. 25.

The U.S. Gulf Coast accounts for some 12 per cent of Nexen production, which meant U.S. approval was required.

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