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Business Briefing Canadian dollar whacked by ‘semi-historic’ Chinese devaluation

'Semi-historic'

China’s “semi-historic” devaluation is rippling across financial markets today, taking the Canadian dollar down with it, among others.

Other commodity-linked currencies, like the Australian and New Zealand dollars, are also being hit, even moreso than the loonie as the U.S. greenback also rises.

The move by China’s central bank today is hurting such currencies because the country is such a big importer of commodities. When its currency tumbles, it loses buying power.

The loonie slid today to as low as 76.05 cents (U.S.), as oil prices also fell, having touched a high just shy of the 77-cent mark.

The central bank’s move was seen by some market watchers not as part of a “currency war” but rather a transition to a “possibly more transparent and market-oriented fixing methodology,” as Société Générale put it.

Beijing’s action most affects the currencies of the countries that do a hefty amount of trade with China, notably Australia, New Zealand and Japan, said Greg Moore, senior currency strategist at RBC Capital Markets.

“For CAD, the impact is less clear and would come indirectly through either the broad reaction of USD or commodity prices,” he added, referring to the Canadian and U.S. dollars by their symbols.

“The reaction in both of those channels has been mixed, but I would say the risk is tilted toward a higher USD/CAD (broad USD strength and pressure on commodity prices.)

By that, he means the Canadian dollar is likely to tumble even further.

“Today’s move in the loonie is more suggestive of a stronger USD off of this move than anything else, but softer growth prospects in China could hit commodities and commodity currencies in the medium term (keep an eye on Chinese retail sales tomorrow) and that could be another reason to stay underweight the loonie,” added Bipan Rai, the director of foreign exchange and macro strategy at CIBC World Markets.

The People’s Bank of China devalued its currency - the yuan or renminbi - for the first time in two decades.

That filtered through currency and stock markets alike, affecting, for example, major exporters who ship goods such as autos to China.

“Today is semi-historic in that China has devalued the renminbi for the first time since 1994,” said John Normand, JPMorgan Chase & Co.’s head of foreign exchange, commodities and international rates research.

“That adjustment was about 50 per cent and today’s less than 2 per cent, but when the world’s second-largest economy alters its exchange rate regime for the first time in over 20 years, the implications are worth unpacking.”

Among those implications is the hit to commodities and the currencies that are linked to them as it underscores the “China business cycle context” that spurred the central bank to action.

“So insofar as today’s PBoC [move] highlights underlying growth concerns, it is as negative a signal for near-term commodity demand as the past nine months of interest rate cuts have been,” Mr. Normand said in a report.

“We could be more optimistic on the link between stimulus and commodity demand if China weren’t such a leveraged economy,” he added.

“Thus we’re comfortable holding a number of shorts in these markets like [the loonie versus the U.S. dollar.]”

China’s central bank devalued by 1.9 per cent by adjusting its daily fix to the American dollar.

“China’s renminbi has been dragged higher in the last 12 months despite an underperforming economy because of its peg to the U.S. dollar, which has been gaining on expectation of higher interest rates in the United States,” said analyst Jasper Lawler of CMC Markets in London.

“A stronger renminbi contributed towards a slump in Chinese exports in July so Chinese authorities have addressed the issue directly through currency devaluation to make China’s exports relative cheaper abroad.”

A comment I'd love to hear

“It wasn’t that I didn’t want to move to Vancouver. I only earned $9.4-million last year and couldn’t afford a house.”

Market angst

From auto makers to miners to producers of luxury items, the surprise devaluation is being felt in markets around the world.

“China’s unexpected currency devaluation ... is driving broad-based risk aversion across markets as participants consider its implications for global commodity demand, inflation, and the balance of risks to growth,” said Bank of Nova Scotia currency strategist Eric Theoret.

While rattling the markets, the devaluation could also held China in its bid to have the International Monetary Fund recognize the yuan as a reserve currency, said Brenda Kelly, head analyst at London Capital Group, but “it may also raise questions as to the true health of the Chinese economy.”

Stock markets are down across the board today.

China’s Shanghai composite actually fared the best, down only marginally.

But Tokyo’s Nikkei lost 0.4 per cent, and Hong Kong’s Hang Seng 0.1 per cent.

In Europe, London’s FTSE 100, the Paris CAC 40 and Germany’s DAX were down by between 1.1 per cent and 2.7 per cent.

North American stocks also tumbled.

“The commodity-related companies are feeling the pain of the Beijing decision, and faith won’t be restored in the metals industry until Beijing’s actions show signs of improvement,” said IG market analyst David Madden.

Quote of the week (so far)

“It’s a ‘technical recession’ when somebody else has lost their job. It’s a ‘recession’ when you’ve lost your job.”
Avery Shenfeld, CIBC

Housing starts slip

The construction industry suffered something of a setback last month, though is still seen as strong.

Housing starts slipped in July to an annual pace of 193,032 units from June’s 202,336 in June.

Construction of multi-unit buildings, like condos, fell 8.2 per cent, while those for detached homes dipped 0.8 per cent, Canada Mortgage and Housing Corp. said today.

A six-month moving average shows starts up to 185,586 in July from 184,035 in June.

It was still deemed a “solid reading” for the industry despite the monthly dip, according to Nick Exarhos of CIBC World Markets.

“The drop-off came from a moderation in both singles and multiples,” Mr. Exarhos said.

“Still, the most recent reading is above the six- and 12-month averages which both stand at around 185,000, and highlights how relatively unscathed the trend in housing starts have been from the oil shock, outside of the most affected provinces.”

Politics and the oil shock

No one likes a government that presides over a recession, no matter where the blame may lie.

Obviously, the federal Conservatives didn’t spark the oil shock that laid Alberta so low.

But they now have a battle on their hands in what has been their stronghold, which has already been lost provincially to the New Democratic Party.

As Calgary pollster Bruce Cameron told The Globe and Mail’s Jeffrey Jones, in good times there’s a “halo effect” for a governing party. But in desperate times like these, there’s a “negative halo effect.”

Not quite a red pitchfork, but you get the idea.

As Mr. Cameron noted, Alberta is rife with disquiet, unrest and uncertainty in the wake of the collapse in crude prices, which sparked a wave of job cuts and the loss of billions in capital spending in the oil patch.

Unemployment is on the rise, the housing market has been hit and pay raises have suffered, all of which are unfamiliar ground in the province that used to rule the Canadian economy.

By some accounts, it’s going to get worse before it gets better as the shock ripples through the broader economy.

It will get better, but not by Oct. 19.

Alberta is believed to be in a recession, its economy expected among some forecasters to contract by 1 per cent this year.

“A double whammy of reduced capital spending in the oil patch and a projected 10-per-cent decline in housing starts are expected to take a toll,” Derek Burleton, Toronto-Dominion Bank deputy chief economist, and his colleague Jonathan Bendiner said in a recent outlook for the province.

“In contrast, oil production is on track to grow 4 to 5 per cent this year, providing a partial offset to the retrenchment in investment.”

Jobs are a huge issue in the wake of layoffs among major corporate players.

Unemployment has spiked to 6 per cent, still below the national average but much higher than Alberta is used to.

The jobless rate in Calgary now stands at 6.6 per cent, troublingly close to Canadian unemployment of 6.8 per cent and catching up to the pace in Toronto.

“That’s the first time in more than 15 years that Calgary’s rate has not been below Toronto’s,” chief economist Douglas Porter of BMO Nesbitt Burns said, noting how the tide has shifted from eight months ago, when Toronto suffered a jobless rate of 8 per cent and Calgary enjoyed a pace of just 4.6 per cent.

Which, in turn, has sent claims for jobless benefits soaring in Alberta.

By May, the number of employment insurance recipients was up a sharp 61.3 per cent, or 18,600 people, from a year earlier.

On a city-by-city basis, the number of recipients rose 13.3 per cent in Edmonton and 9.6 per cent in Calgary.

“A surge to a six-year high in the number of Albertans filing initial claims for employment insurance this spring raises concern of an even sharper upturn in unemployment in the coming months,” Royal Bank of Canada economist Laura Cooper said in a recent report.

“What’s more, wage growth (as measured by average weekly earnings) has weakened considerably in 2015 and is now on par with the national average,” Mr. Burleton and Mr. Bendiner added in their forecast.

“The softening conditions in labour markets will be a constraint on consumer spending and housing activity during the second half of the year, where resale home prices are forecast to contract 1.8 per cent in 2015.”

Home sales so far this year are down by almost 25 per cent in Calgary from the same period last year.

Prices are still up in the same seven months, by 2.8 per cent, but the value of homes changing hands is down 26 per cent.

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