Commentary by Kathy Lien: Bank of Canada Continues Quantitative Easing
Due to a strong currency and weak U.S. demand, the Bank of Canada decided to continue their Quantitative Easing program, pushing the loonie lower against the greenback. As expected, the BoC left interest rates unchanged at a record low of 0.25 percent but they set a new schedule for their Purchase and Resale agreements, indicating that they are not ready to slam the breaks on QE. The central bank also reiterated their commitment to leaving rates unchanged until June so there shouldn’t be any major surprises until then.
Despite a continued global recovery, the Bank of Canada revised down their 2010 GDP forecast from 3 to 2.9 percent and revised up their 2011 GDP forecast from 3.3 to 3.5 percent. The risks to inflation are roughly balanced but the general risks to their inflation projection are tilted slightly to the downside. Overall, the tone of the BoC report suggests that they have grown more dovish since their last monetary policy. The central bank’s plans to provide continued stimulus should limit a further decline in USD/CAD. It is important for forex traders to remember that the stronger the CAD becomes, the more reluctant the BoC will be to raising interest rates.
Meanwhile Canadian leading indicators rose 1.5 percent in the month of December, matching the strongest pace of growth since 1983, for the largest monthly advance since Sept 1958. All 10 of the underlying components of the report was neutral to positive with contributions primarily coming from an increase in new orders, durables and business service employment. The recovery in the U.S. economy helped to boost Canadian exports while consumers stepped up their purchases of durable goods. Even the hottest leading indicator report since 1983 has failed to sway the Bank of Canada because it is at odds with the recent deterioration in the IVEY PMI, retail sales and employment figure
U.S. traders have returned from their long weekend and their presence can certainly be felt as volatility picks up in the currency market. The U.S. dollar traded higher against all of the major currencies except for the British pound thanks to stronger economic data and the possibility of a Republican win in Massachusetts. Although it is widely known to forex traders that politics always trumps economics, it is rare that a Senate race would receive as much attention from the financial markets as today’s election in Massachusetts. The reason why it is the primary event risk for the forex market this week is because if Democrats lose their 60th seat, it could delay the passing of the health care bill and any other initiatives. The equity markets sent health care stocks higher on the hope that a Republican win would deal a setback to the proposed reforms. The dollar is being bid up for the same reason because the health care plan was slated to cost more than $1 trillion. We are not passing judgment on whether this is positive or negative for the American public but rather what it would mean to the U.S. dollar. Deteriorating U.S. finances has been one of the primary reasons why foreigners have criticized the dollar and the Obama Administration have received heated questionING by the Chinese government on the costs of the health care plan and its impact on the budget deficit. Not having to pay these outlays is perceived as dollar positive simply from the perspective of fiscal finances. The Obama Administration has painstakingly stitched together the 60 Democratic votes needed to approve any future changes to the health care bill. The plan could still be passed if the Senate speeds up negotiations before the Republican Senator is sworn in or convinces certain Republicans Senators to reconsider the bill, but that may not stop traders from buying dollars on the hope that government spending will be curtailed. If the Democratic candidate wins, today’s moves in the equity and currency markets may be reversed.
Foreigners Still Buying Dollars
Meanwhile according to the latest U.S. economic reports, foreigners are still buying U.S. dollars. Net foreign purchases of long term U.S. securities increased by $126.8B in November, the strongest demand ever while total demand including sales of short term securities increased by $26.6B. The demand was particularly impressive considering that the dollar hit a 1 month low in November which means that foreign appetite was unaffected by the dollar’s weakness. The data also suggests that investors shifted their holdings from short to long term securities, which means that they may be growing more confident about the U.S. recovery. Producer prices and housing market numbers are due for release tomorrow and given the slower growth in CPI and import prices, we expect producer price pressures to remain muted. With the NAHB index falling to the lowest level since April, we do not expect a meaningful pickup in permits or housing starts. The earnings season is also heating up with Citigroup reporting a $7.6 billion loss this morning. Bank of America, Bank of NY, eBay, Morgan Stanley, State Street, U.S. Bancorp and Wells Fargo are amongst the large number of companies reporting tomorrow. The tone in the equity market should affect how currencies trade. Finally it is worth noting that China has once again increased their 1 year bill rate. Their continued efforts at tightening monetary policy is hurting risk currencies because of the fear that if China slows, the rest of the world will follow as well.
For the fourth trading day in a row, the euro failed to rally against the U.S. dollar. The combination of weaker economic data, demand for dollars and continued concerns about Greece has kept a lid on the EUR/USD. The German ZEW survey fell from 50.4 to 47.2 in the month of January, which indicates that investors have grown less optimistic about the outlook for the economy. The deficit problems in Greece and the decline in German consumer spending made investors wary even though their assessment of current conditions improved. Exports have been strong but the momentum of the global recovery is waning and it remains to be seen whether export demand will continue to rise. There are also growing doubts that Greece will be able to tackle their fiscal problems alone. As much as we believe that the Greek issues will not lead to the demise of the Eurozone, we cannot ignore this fear amongst investors. Looking ahead, German producer prices are due for release tomorrow and given slower import price growth, inflationary pressures are expected to be modest. Last week, the ECB indicated that they are in no rush to raise interest rates and softer inflationary pressures would reduce this need further.
Although the British pound ended the NY trading session only slightly higher than the U.S. dollar, it staged a very strong rally against the euro. Unlike other parts of the world, inflationary pressures in the U.K. have accelerated. Based upon the latest consumer prices figures, CPI rose by 0.6 percent last month, double the market’s expectations. This pushed annualized consumer price growth from 1.9 to 2.9 percent, well beyond the Bank of England’s 2 percent inflation target. Higher oil prices and the elimination of cuts in sales tax and retail prices from last year caused price pressures to exacerbate but it remains to be seen whether this pickup in inflation will last. Following the numbers, Bank of England Governor King said that even though inflation may exceed 3 percent, the price increases will prove to be temporary. Economic data could be very volatile in coming months as the VAT tax and weather issues cause economic data to “dance vigorously.” Yet he anticipates low money growth to eventually bring inflation back down to 2 percent. Although the BoE is currently one of the most dovish central banks, an uptick in economic data could prompt the central bank to stop thinking about loosening monetary policy and start thinking about tightening it. The minutes from the Bank of England meeting are due for release tomorrow and they will shed more light on where the monetary policy committee stands. If central bank officials grew more optimistic, it could fuel further gains in the pound. In addition, employment numbers are due for release and we believe that the labor market continued to improve which should help the currency.
The Canadian and Australian dollars ended the day lower against the greenback while the New Zealand dollar ended unchanged. As expected, the Bank of Canada left interest rates at 0.25 percent. Due to a strong currency and weak U.S. demand, the BoC decided to continue their Quantitative Easing program by setting a new schedule for their Purchase and Resale agreements. The central bank also reiterated their plan to leave interest rates steady until June but the tone of the report was slightly more bearish than the previous month. Their GDP forecast for 2010 was revised downward and their inflation projection is tilted slightly to the downside. However the losses in the Canadian dollar were tempered by the strong leading indicators report which rose 1.5 percent in the month of December, matching the strongest pace of growth since 1983, for the largest monthly advance since Sept 1958. Consumer prices from Canada are due for release tomorrow along with New Zealand CPI this afternoon and Australian consumer and business confidence.
The performance of the Japanese Yen over the past 24 hours has been mixed with the currency falling against the British pound, U.S., Australian and New Zealand dollars but rising against the euro and Swiss Franc. The divergence in price action suggests that risk appetite did not drive the price action in the foreign exchange market. Weaker economic data and an official bankruptcy filing by Japan Airlines weighed on the Yen. Consumer Confidence fell to the lowest level in six months as a drop in wages and rising unemployment escalated weak sentiment. The confidence index of households slumped to 37.6 from 39.5 in the previous month and the portion of people anticipating prices to descend surpassed those who see goods becoming more expensive for the first time since the survey began in April 2004. Approximately 32 percent of surveyed individuals expect the prices to decrease compared to nearly 29 percent expecting them to rise. The government is trying to take additional measures to prevent a double dip recession and to boost inflation. Financial Minister Naoto Kan advocated for the lawmakers to pass additional ¥7.4 trillion or $82 billion extra budget for the current fiscal year. In the mean time, Prime Minister Yukio Hatoyama stated that the government and the BOJ will work closely together to find ways to overcome deflation.
GBP/USD: Currency in Play for Next 24 Hours
GBP/USD will be the currency in play for tomorrow. Bank of England Policy Meeting Minutes as well as employment figures are due from the U.K. at 9:30GMT or 4:30AM EST. The U.S. will follow with PPI, housing starts and building permits at 13:30GMT or 8:30AM EST. The GBP/USD is currently trading within the Buy Zone, which we determine using Bollinger Bands. However after hitting a high of 1.6458 intraday, the currency pair has given up nearly all of its earlier gains. The 1.6300 level is fairly important support for the currency thanks to the 50 and 100-day SMA. Even if the GBP/USD breaks that level, the uptrend will remain intact as long as the GBP/USD holds above 1.6250. On the topside, resistance is at 1.6480, which is the 61.8 percent retracement of last year’s November high and December low.
Some Dubai World Creditors Said to Seek Loan Sale
Some creditors to Dubai World, which is currently restructuring $22 billion of debt, are seeking to offload loans to reduce their exposure to the Gulf emirate’s conglomerate, The Financial Times reported.
Debt traders told potential investors that there was a seller looking to offload about $100 million of Dubai World loans, the newspaper said.
The sellers are believed to be mostly some of the smaller international banks which are unhappy with the restructuring process, The Financial Times said, citing a Dubai-based banker.
Dubai World, which owns property unit Nakheel, port operator DP World and private equity company Istithmar World, is currently in talks with its creditors to finalize a formal standstill agreement that would last for six months, during which the conglomerate will further restructure its debt pile. Bank creditors often opt to sell their loans at a discount, allowing distressed debt funds to build positions and possibly influence the restructuring process.
It is not certain the sales will take place, the newspaper said.
Sainsbury’s to switch tomato packaging from tins to Tetra
Sainsbury’s says its new tomato cartons will reduce packaging and carbon emissions, but critics warn the move may also increase landfill
While cartons are lighter than tin cans and can be recycled with over two-thirds of UK councils, the Metal Packaging Manufacturers’ Association questioned Sainsbury’s latest move, claiming that waste to landfill could rise as a result. In a statement it said: “Cans have the highest recycling rate of any packaging material in Europe. In the UK two-thirds of food cans avoid landfill completely and are recycled. What’s more, metal is infinitely recyclable – it can be reused again and again with no loss of quality.”
HONG KONG (MarketWatch) — Asian markets ended mostly lower in quiet trade Tuesday as investors awaited key earnings reports from the U.S, with regional chip makers dropping sharply on worries about recent declines in memory-chip prices.
Chinese banking stocks advanced as concerns over monetary tightening eased after comments from the country’s banking regulator late Monday. The China Banking Regulatory Commission sent a mobile-phone text message to reporters saying banks will always be required to base their lending on real demand and properly manage the pace and quality of lending. The comments were taken as a response to a report, widely cited by local media, that the CBRC had set new yuan loan quotas for the country’s big state-owned lenders.
“The hike in the reserve requirement and the draining of liquidity, while in fashion with the notion of flexibility and targeting, cannot be dismissed as anything other than tightening — no matter how minor at this stage,” Societe Generale’s Asia forex and rates strategist Patrick Bennett wrote in emailed comments. Still, “investors should be cheering the steps China is taking to better target expansion of bank lending this year,” he added.