Thursday, October 15, 2009

NYT: Anxiety in Canada Over Near Parity with US Dollar - Quantitative Easing Time Soon Up North?

All the world prefers a strong dollar, except American leadership - how else to pay off our massive debts? As the dollar continues its free fall, we are beginning to hear the same grumbling we heard 2 years ago (pre crisis) especially from Europe, but even Canada, who is extremely reliant on exports, is beginning to raise a fuss. Oh well, we've got the biggest guns... whatcha gonna do about it?

You are going to see the benefits of a horrid dollar in IBM's results in the coming hour; it's a beautiful thing if you are a US based multinational. We were writing in 2007 how so many of the largest American companies were posting 4-5-6% type of revenue growth, but were turbocharging their results with currency adjustments - therefore revenue "grew" by 12-15% and since no on in popular financial media bothers to look beyond a headline we heard great tales of strong revenue. But really who has time to look at the body of an earnings release these days when "investing" is all about moving like lemmings (of course far slower than HAL9000 and his computer chip) to bid stocks up or down within fractions of a second from when the earnings headline hits the news wire?

p.s. for gosh sake this US peso is due for an oversold bounce at some point; is there anyone in the world long dollars? The most crowded trade on Earth.

  • For Canadians looking to escape winter’s premature arrival in many parts of the country by visiting the United States, the equally unexpected movement of the Canadian dollar toward parity with its American counterpart is welcome news. For corporate Canada, however, the development is less inspiring.
  • At Cascades, a producer of cardboard used to make boxes and tissue paper, every cent the Canadian dollar gains shaves 4 million Canadian dollars from its operating earnings.
  • With 40 percent of the Canadian economy dependent on trade, mostly with the United States, the prospect of the two currencies being at par for the second time since 2007 probably creates more anxiety than joy in Canada. And while currencies around the world have been rising against the United States dollar, many are laggards compared with Canada’s. Since mid-March the Canadian dollar has risen 27 percent, closing on Wednesday at 97.30 cents, up from 76.53 cents.
  • “The Canadian dollar is a strong threat to the economy,” said David Watt, a vice president and senior currency strategist at the Royal Bank of Canada. “Once the Canadian dollar starts getting to levels like parity, the recovery scenario goes from assured to dicey.”
  • Most economists and businesses had forecast that the Canadian dollar would appreciate this year and had set their budgets and, in the case of large corporations, their currency hedging strategies appropriately. But few if any of them anticipated that the rise would be as rapid and that the result would most likely be parity.
  • Thomas J. Velk, an economics professor at McGill University in Montreal, said he believes that the Canadian currency’s movement also reflects the perceptions by the currency markets of the economic prospects of the United States. That dissatisfaction is causing some capital movement from the United States to Canada, in Professor Velk’s analysis. And that trend, he added, is amplified by recent investments in Canadian mining and energy companies by their Chinese customers.
  • In 2007, exports were strong when Canadian companies were confronted by a high dollar. That, however, is no longer the case partly because Canada’s manufacturing sector is particularly dependent on the American automotive industry.
  • Since July 2008, Canadian exports have fallen 21.3 percent by volume, and export prices are down 16.3 percent, according to Statistics Canada, a government agency.
Now here it gets interesting....
  • In speeches over the last several months, Mark J. Carney, the governor of the Bank of Canada, has warned currency markets that he will take action if the Canadian dollar“appears to move away from fundamentals.”
At first I laughed (indeed I scoffed as well) at that remark, thinking... if the UK could not intervene in currency markets in the 80s to protect their currency what chance does Canada have? But then I forgot we are in a global race to the bottom! Ben Bernanke has taught all the world about helicopter drops....all fiat currencies must burn as central bankers go wild.
  • If and when that time comes, Mr. Carney said he may resort to “quantitative easing, the printing of money” given that he has effectively exhausted interest rate cuts.
Boo Yah! Problem solved.

When the Banana Republic is some far off 3rd world country it is one thing; but now you see when the largest economy in the world is the Banana Republic, all the interconnected offshoots of its reckless policies .... are endless. Go Team USA.
  • ... several business groups in Canada argue that the time has come. The recent movements up and down look more like a penny stock than a currency,” said Avrim Lazar, the president and chief executive of the Forest Products Association of Canada. “The time for talking the dollar down has passed. This is the sort of thing that will just suck the life out of the recovery.”

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