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You can’t keep a good loonie down (even if it’s ‘overpriced’ by 6¢)

These are stories Report on Business is following Monday, July 21, 2014.

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Currency resilient
You can't, it seems, keep a good loonie down.

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The loonie, as Canada's dollar coin is known, withstood the many blows that "rained down hard" last week, as economist Sal Guatieri put it, and, indeed, was above 93 cents U.S. today.

The Canadian dollar suffered heavily in the first three months of year, before perking up in the second quarter to mark the best performance among the world's major currencies.

And that won't sit well with the Bank of Canada, which, while not tampering with the currency, would of course like a weaker Canadian dollar to help juice a hoped-for rebound in exports.

"Short of cutting rates or selling the currency, dovish talk is about the only weapon it has left to counter the loonie's true best friend: higher short-term rates," Mr. Guatieri said in reference to the softer outlook for the Canadian economy unveiled by the central bank last week.

"Declining employment, fading natural gas prices and rising geopolitical tensions also landed a few body blows on the loonie in the past week," said the senior economist at BMO Nesbitt Burns.

But the currency's toughest enemy "is itself," according to Mr. Guatieri.

"At 93 cents U.S., it is overpriced, as witnessed by a chronic trade deficit (five years and counting) and steady one-way traffic over the border," he added in a research note.

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"Since the Canadian dollar began rising in March, the number of Canadians visiting the States (and returning with cheaper goods) has begun climbing again after ebbing in the previous year. Meantime, the number of Americans setting foot in Canada is pretty much glued to record lows."

The view of the loonie has been shifting, so much so that speculators who had bet against it have now retreated.

Only recently did the billions in the net short positions reported by the U.S. Commodity Futures Trading Commission dwindle to nothing, and then move into positive territory to reach almost $1.5-billion in long positions last week, as reported by the CFTC on Friday.

"CAD and AUD continue to benefit from improving sentiment on the back of a supportive growth outlook … with net long positioning in both rising to levels not seen since [the first half of] 2013," said currency strategists Camilla Sutton and Eric Theoret of Bank of Nova Scotia, referring to the Canadian and Australian dollars by their symbols.

"For AUD the improvement reflects a steady rise in gross longs, while for CAD the build in longs remains a recent development, with the net reflecting an ongoing trend of short covering."

BMO's Mr. Guatieri believes the Canadian dollar's "fair value" is more around the 87-cent mark. And like some other observers, he believes the loonie will sink by about that six-cent difference over the next year or so given the economic outlook and speculation that the Federal Reserve will be faster than the Bank of Canada to hike its key interest rate, which now lags the Canadian benchmark.

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"Assuming the U.S. economy outperforms Canada and the Fed leads the BoC's hand in lifting rates, that's probably where the loonie will end up a year from now," Mr. Guatieri said.

"But its surprising strength in the fact of ongoing challenges probably says something about where the risks lie."

What to watch for
Investors will have one eye on the troubles in Ukraine and the Middle East this week, and the other on a raft of corporate results, from the tech heavyweights to the auto giants.

Netflix Inc. reported after markets closed today, and will be followed later in the week by the likes of Apple Corp., Microsoft Corp. and Facebook Inc.

Netflix shares gained in after-hours action as its second-quarter profit more than doubled to $71-million (U.S.), or $1.15 a share, from $29-million or 49 cents a year earlier, and revenue climbed to $1.34-billion from $1.07-billion.

Ford Motor Co. and General Motors Co. earnings are also on tap this week, as are some big Canadian companies, including Potash Corp. of Saskatchewan and Loblaw Cos. Ltd.

So far this earnings season, it's been pretty good.

"While the Fed chair was musing about valuations, earnings reports were rolling in better than expected, especially in the financial sector," said senior economist Robert Kavcic of BMO Nesbitt Burns, referring to last week, when earnings reports began to come in in earnest and Federal Reserve chief Janet Yellen warned about the high stock prices of some tech and biotech companies.

"Indeed, financials have been a major factor behind the solid start to the Q2 earnings season," Mr. Kavcic said.

"Just over 76 per cent of S&P 500 companies have topped earnings expectations so far, according to Bloomberg's tally, and nearly 70 per cent have beaten the mark on revenues," he added in a report.

"The technology sector has been no slouch either, and broad forward-year S&P 500 earnings expectations are again moving higher. We'll get a broader sector picture of earnings performance in the coming weeks, but so far, generally upbeat results are consistent with our outlook for stronger economic growth in Q2 and beyond, and exactly what equity investors need to see in light of recent valuation expansion."

BlackBerry names COO
BlackBerry Ltd. made a key appointment today, naming Marty Beard as chief operating officer of the Canadian smartphone company.

Mr. Beard, formerly chief executive officer of LiveOps Inc., brings the Waterloo, Ont.-based company "extensive experience in operations, marketing and serving customers," BlackBerry CEO John Chen said in a statement.

The position has been unfilled for months.

Before LiveOps, Mr. Beard headed up a unit of Sybase Inc., and before that was a vice-president at Oracle Corp., The Globe and Mail's Bertrand Marotte reports.

Allergan cuts jobs
Takeover target Allergan Inc. is slashing 1,500 jobs – about 13 per cent of its work force – in a major streamlining effort as it moves to bolster its defences against a hostile takeover bid from Valeant Pharmaceuticals International Inc.

The Botox-maker also said today it will eliminate an additional 250 vacant jobs as part of a sweeping cost-cutting and efficiency-boosting initiative aimed at annual pre-tax savings of about $475-million (U.S.) in calendar 2015.

The restructuring is part of Allergan chief executive officer David Pyott's strategy to boost earnings, cut spending and demonstrate that the company can create better shareholder value as a standalone rather than in a tie-up with Laval, Que.-based Valeant, The Globe and Mail's Bertrand Marotte reports.

Meanwhile, Valeant said today it has filed a complaint with securities regulators in Quebec and the U.S. over allegedly unfair tactics by Allergan.

Britain launches probe
British authorities have launched a criminal probe into the foreign exchange market in the wake of investigations by regulatory bodies.

The country's Serious Fraud Office said little about the probe today, issuing a one-sentence statement saying simply that "the director of the Serious Fraud Office has today opened a criminal investigation into allegations of fraudulent conduct in the foreign exchange market."

There were no details of the allegations, though regulators have been investigating in Britain, the United States and elsewhere.

Individual banks have also moved on the allegations.

"These allegations have yet to be proved, but if the Serious Fraud Office does find them to be true, it will strike at the heart of business ethics," said Professor Mark Taylor of Britain's Warwick Business School.

"The foreign exchange market is massive and it is by definition global, making it very hard to control and oversee," he added.

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More


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