Ralph Shell @ 1:32 PM, Tuesday July 20 2010
Today's increase of the bank rate by the Bank of Canada by .25% was according to the anticipated script, and for the most part, a non event for the market. The Bank implies that further increases in the rate are not assured because economic growth projections have been scaled back by 0.2% of GDP both this and next year. A weaker global economic recovery, with only modest domestic consumer growth, is cited by the bank as the reasons caution is in order.
What can we expect in the future from the Bank of Canada? This morning Avery Shenfield, chief economist CIBC World Markets had some interesting observations:
"Having slashed rates to the max during the global economy’s Great Recession, the central bankers are, at this point, only certain that Canada no longer needs such extreme stimulus from monetary policy......The text of the Bank’s message to markets, therefore, continues to reflect a note of caution. In particular, it retained its fuzzy language about the future path of rates, saying that subsequent hikes would be “weighed carefully”....and he concluded by saying" today’s rate hike and soft-pedaled language combined to be a rate CUT for those borrowing at fixed rates. We don’t expect that reaction to last. Further rate hikes in September and October will now come as a surprise to markets, pushing yields across the curve to higher levels, and giving a dose of support to the Canadian dollar."
The economic news coming from Canada has continued positive. Yesterday it was reported that foreigners bought a record net purchases of C$23.2B Canadian securities in May. Investors were most aggressive purchasing a record amount of C$15.2B Canadian bonds. Last week the Canadian leading indicators exceeded expectations, up 1%, and in the previous week the Canadian increase in employment, and the decreases in the unemployment rate to 7.9% were pleasant surprises.
Despite the good news, this has been no help for the loonie. With the US economy suffering from an expanding economic malaise, the C$ is penalized because of the close geographical location to its major trading partner, and perhaps a certain guilt by close association. We think this is inappropriate analysis, and going forward the C$ may be more of a safe haven than either the yen or the USD.
This concept might be a hard sell to those who habitually flock to US Treasuries when troubles emerge, but does not a 10 year Canadian note yielding 3.10% sound more attractive than the US note yielding 2.90% especially when the C$ is a 4.5% discount to the USD. Granted you can't buy trillions of the Canadian paper like you can the US, but that might be a good thing.
What is a fair value for the C$? Since Forex trading if definitely more of an art than a scientific skill we will cast our vote. Below 1.05 we want to sell the USD and buy the C$ on a scale down basis. Should, for what ever reason, the pair trade down to the 1.0850 we still want to be on the buy side, so we need to be conservative on the early buys. Be patient. If the market does not give you this opportunity, there will be many more.
What can we expect in the future from the Bank of Canada? This morning Avery Shenfield, chief economist CIBC World Markets had some interesting observations:
"Having slashed rates to the max during the global economy’s Great
Recession, the central bankers are, at this point, only certain that
Canada no longer needs such extreme stimulus from monetary policy......The text of the Bank’s message to markets, therefore, continues to
reflect a note of caution. In particular, it retained its fuzzy language about the future path of rates, saying that
subsequent hikes would be “weighed carefully”....and he concluded by saying" today’s rate hike and soft-pedaled language combined to be a rate CUT
for those borrowing at fixed rates. We don’t expect that reaction to
last. Further rate hikes in September and October will now come as a
surprise to markets, pushing yields across the curve to higher levels,
and giving a dose of support to the Canadian dollar."
Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.