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Let's be franc: Swiss money may be better than gold

These are stories Report on Business is following Tuesday, July 19. Get the top business stories through the day on BlackBerry or iPhone by bookmarking our mobile-friendly webpage.

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Being franc Amid the turmoil in currency markets, the Swiss franc is booming, and expected to go higher still, buoyed by the country's safe haven status.

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"Most of the world's major 'paper' currencies have fallen out of favour," John Higgins, senior markets economist at Capital Economics in London, said in a report today.

"But the Swiss franc is an exception to the rule. It has even outperformed gold since the start of the year. We expect the upward pressure on the franc to continue even in the event of fresh currency intervention, and forecast that the exchange rate against the euro will reach parity at some point next year, if not before."

Mr. Higgins, who sees the franc as "significantly overvalued," isn't basing his projections on the outlook for tame economic growth, and he doesn't expect a boost in Swiss interest rates.

"Rather, we think the Swiss franc will continue to benefit from its increasingly isolated status as a safe haven among paper currencies," Mr. Higgins wrote.

"The current spat over the U.S. debt ceiling, the euro zone's escalating fiscal crisis, and Japan's growing mountain of debt have thrown the healthier state of Switzerland's public finances into sharp relief - Swiss public debt is just 55 per cent of GDP and the budget is broadly balanced. The share of Swiss francs in 'allocated' global foreign exchange reserves is also tiny - just 0.11 per cent at the end of [the first quarter]according to the IMF. This suggests that if other central banks become more concerned about the outlook in the major developed economies, the franc could benefit considerably."

That won't please the Swiss, he added, and could lead to currency intervention, but that would not bring much relief.

Mr. Higgins isn't alone.

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CIBC World Markets economists Emanuella Enenajor, Avery Shenfeld and Jeremy Stretch said in a report today they, too, expect the franc to continue climbing.

"In light of escalating near-term default risks in the euro zone, we have revised our call for the Swiss franc stronger, as it should remain supported against the euro over the next few quarters, at least until the dust settles on how sovereign debt woes in the euro zone are to be dealt with," they said.

The CIBC economists noted, though, that Switzerland's central bank chief, Philipp Hildebrand, recently ruled out intervening in markets to temper the currency's rise, as the bank did in 2009 and again last year.

"So while the Swissy might still be overvalued against the euro on longer-term fundamentals, shorting the Swiss currency against the euro is unlikely to be a profi table trade for a while longer."

Rate hike in the works? The Bank of Canada held its key rate steady today but put the country on alert - ever so gently - that a hike is coming. That could be before the end of the year.

Before today, some observers believed the central bank's overnight rate wouldn't move beyond 1 per cent until next year. But by dropping the word "eventually" from its statement this morning, as it talked about the need for higher rates, the Bank of Canada put a rate hike into play this year, possibly in October or December, or both.

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In its May statement, the central bank had said that "some of the considerable monetary policy stimulus currently in place will be eventually withdrawn." Today's statement simply removed "eventually." It still said any such move would be "carefully considered," though.

As The Globe and Mail's Jeremy Torobin reports, the central bank cited concerns over the debt crisis in Europe, and the hit to exports from the strong Canadian dollar .

"The clock is running out on ultra-low interest rates in Canada," said Avery Shenfeld, chief economist at CIBC World Markets.

"In dropping the word 'eventually' that it had previously used in discussing the timing for future interest rate increases, the Bank of Canada gave a not-too-subtle hint that it expects to begin that process before year-end. Whether the next quarter-point hike comes in October, as we expect, or in September as is also a possibility, rising interest costs will be coming sooner than 'eventually,' and earlier than financial markets had been pricing in before this morning's announcement."

There's still much uncertainty as to the timing of any such move, however.

"Global fiscal risks are heightened and economic growth in the U.S. has been sub-par to date," said Toronto-Dominion Bank economist Sonya Gulati. "With this in mind, we recently changed our call to January 2012. Today's communiqué confirms that monetary stimulus will soon come to an end. Still, the timing of such withdrawal must be judged in context with global economic developments, how the domestic economy plays out, and any underlying risks."

As for the overall economy, the Bank of Canada noted that "despite increased global risk aversion, financial conditions in Canada remain very stimulative and private credit growth is strong."

The central bank projects economic growth of 2.8 per cent this year, 2.6 per cent next, and 2.1 per cent in 2013, and it isn't an island in a sea of turmoil. Here's how things look to the central bank:

"The U.S. economy has grown at a slower pace than expected and continues to be restrained by the consolidation of household balance sheets and slow growth in employment. While growth in core Europe has been stronger than expected, necessary fiscal austerity measures in a number of countries will restrain growth over the projection horizon. The Japanese economy has begun to recover from the disasters that struck in March, although the level of economic activity in that country will remain below previous expectations. In contrast, growth in emerging-market economies, particularly China, remains very strong. As a consequence, commodity prices are expected to remain at elevated levels, following recent declines. These high prices, combined with persistent excess demand in major emerging-market economies, are contributing to broader global inflationary pressures. Widespread concerns over sovereign debt have increased risk aversion and volatility in financial markets."

Euro crisis hits Spain To get a sense of how Europe's debt crisis is spreading, take a look at the results of Spain's bond auction today.

The country sold almost €3.8-billion of one-year paper with a 3.7-per-cent average yield. That's well above last month's 2.7 per cent. There were also 18-month bills that went at 3.9 per cent, compared to 3.3 per cent in June.

"Rising yields pose a threat to EU stability, and will continue to be monitored given Spain's 10 year auction slated for July 21," said Scotia Capital currency strategist Eric Theoret.

There's a bit of confusion in the markets today after Ewald Nowotny, a member of the European Central Bank council and the chief of Austria's central bank, told CNBC that there could be a compromise that might include a short Greek default.

That contradicts ECB chief Jean-Claude Trichet's strict warning that the central will not take as collateral any bonds deemed in default, which would hinder the ability of Greek banks to borrow.

"His comments on ECB independence regarding the decision over what type of collateral it should accept was interpreted in a positive light and taken as a signal that the ECB may be wavering in its commitment to reject default-rated Greek debt at the borrowing window which would impair funding access for Greece's banks," said Derek Holt of Scotia Capital.

"I didn't see his comments as blatantly supporting such an interpretation, and we know that Trichet's position on the matter remains focused upon rejecting default-rated securities."

EU leaders meet in Brussels Thursday to discuss the Greek chaos and the overall turmoil in the euro zone.

RBC keen on Shoppers RBC Dominion Securities has boosted its price target on shares of Shoppers Drug Mart Corp. and raised its recommendation to "outperform" from "sector perform."

Analyst Irene Nattel hiked the target to $47 from $44, noting that the chain has navigated the waters of provincial drug reforms.

"Despite the magnitude of the negative impact, [Shoppers]has managed to deliver flat to marginally higher earnings in the quarters subsequent to drug reform, implying that underlying earnings are continuing to grow by low double digits," the RBC analyst said.

"Despite the headwinds of regulatory reform, [Shoppers]continues to deliver industry-leading front-of-store and Rx count growth. Furthermore, its attractive front-of-store/Rx mix, modified franchise business model, and culture of cost containment enables [Shoppers]to deliver industry-leading profitability at the same time."

Shoppers reports quarterly results Thursday, and, notes Globe and Mail retail writer Marina Strauss, may shed more light on its search for a new CEO.

Griffiths missing Brad Griffiths, one of the founders of GMP Capital Inc. , is missing after being last seen on Lake Joseph early Monday afternoon, police say.

Distraught friends on Bay Street and in Canada's oil patch have been calling up to Mr. Griffiths' Muskoka cottage, trying to get more information as news of his disappearance spreads, but a definitive answer has not been provided, The Globe and Mail's Tara Perkins, Tim Kiladze and Paul Waldie report.

Earnings pour in Corporate results flooded in today as the earnings season began in earnest, following healthy reports yesterday and last week by companies such as IMB Corp. and Google Inc. .

Today, for example, Bank of America Corp. posted an $8.8-billion (U.S.) second-quarter loss, dragged down by a settlement with investors related to mortgage-backed securities. Wells Fargo & Co. posted a profit of $3.95-billion, while Goldman Sachs Group Inc. , the Big Daddy, disappointed with a profit of $1.05-billion.

Investors are awaiting results from tech heavyweight Apple Inc. after markets close today.

In International Business today The emergence of Saudi Arabia as an important consumer sets a critical new trend that could have profound implications for oil prices over the next few years, writes Javier Blas of The Financial Times.

In Economy Lab today Ultra-low interest rates have kept the cost of servicing government debt in the major advanced economies artificially low, but this can't last forever, Ranga Chand writes.

In Personal Finance today One has flashy benefits, the other offers more flexibility

Young graduates are happy to get work experience - but are unpaid internships worth it?

From today's Report on Business

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