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[CAD] FX Alert- BOC HIKES ANOTHER 25 BPS

BOC HIKES ANOTHER 25 BPS

The Bank of Canada hiked another 25 bps, bringing its overnight rate to 0.75%. Although the committee was pleased with jobs being added in Canada, it was concerned about the sustainability of the global economic recovery. Carney et al cited the usual suspects: balance sheet repair by corporations and consumers; European budget deficits and austerity measures; and mixed economic data from the United States, its largest trading partner. The Bank of Canada reduced its GDP forecasts for 2010 (3.5% from 3.7%) and 2011 (2.9% from 3.1%). However, it raised the 2012 growth expectation to 2.2% from 1.9%. The BOC saw no threat of inflation and future rate moves dependent on domestic and global developments.

Regardless of the more subdued expectation from the BOC, we anticipate the central bank to hike another 25 bps in its next meeting. We see the BOC trying to normalize interest rates and guard firmly against any asset bubble. The loonie should strengthen given interest rate differentials; however, we believe USDCAD will be more sensitive to the global risk environment theme. More negative data out of the US may translate to a weaker greenback; however, that would hurt the northern and southern neighbors of the United States. USDCAD should rally as a result. Any global weakness stemming from Europe and/or Asia (China curbing its growth for example) would see USD and JPY rally as safe haven plays, meaning USDCAD would rise. The opposite would be true if one believes this global recovery has legs and will climb gradually. USDCAD would fall back down.

We feel that another rate hike by the BOC is priced in the markets and that risk is to the upside for USDCAD. If the BOC surprises us and does not hike in its September meeting, USDCAD will move higher. We see USDCAD touching 1.0750 by Q3, and 1.0950 by year end.

Kevin Chau, CFA Eric Feld
FX Strategist Senior Account Manager
kchau@ideaus.com efeld@ideaus.com
(212) 835-1330
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[USD] FX Alert- AUGUST NON-FARM PAYROLLS DECREASE -54K--The August Labor Department employment situation report revealed a decrease of -54k in non-farm payrolls, versus the revised -54k decrease that occurred in July (prev. -131k), above market expectations for a -105k decrease. This comes alongside a modest increase unemployment rate of 9.6%, driven by an increase in the civilian labor force. Meanwhile, average hourly earnings came in +0.3% m/m (+1.7% y/y), versus the unrevised +0.2% m/m (+1.6% y/y) increase seen in July. Meanwhile, average weekly hours held unchanged at 34.2 in August. According to the release, the headline reading was weighed down by the unwinding of census activity, reflected in a -111k decline in Federal Government jobs. Private sector jobs increased +67k, showing some deceleration from the stronger increase seen in July. Overall, a mixed bag, though clearly weighed boosted by employment revisions (net +123k increase for June and July).
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[CAD] FX Alert-CA DEFICITS AND BANK BALANCE SHEETS?-Currently a major concern for the advanced economies is that their banks are not lending. Clearly at face value the abundance of excess money sitting on deposit at central banks suggests that this is not a liquidity issue. For Spanish banks with many questioning the quality of the government debt they hold, they have been locked out of the wholesale funding markets and liquidity remains more of a concern. But it is noticeable that some of these problems are less prevalent in other advanced economies such as CAD and AUD, because their banks have not had to repair their balance sheets to the same extent. So issues related to tier one capital was much more relevant to the UK and German banks than those in AUD or CAD. The latest EUR bank stress tests and the ability of US banks to repay TARP funds suggests the equity raising capital process is no longer a significant hurdle to increased lending. Hence we look at why banks may still be reluctant to lend and what macro factors is likely to influence their willingness to lend in the future.
8/18/2010 8:32:02 PM
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[USD]FX Alert JUNE US TICS REPORT: $44.4 BLN OF NET INFLOW--US Treasury's June TICS data on long term international securities revealed a net inflow of $44.4 bln vs. a revised inflow of $35.3 billion in May and market expectations of $45.7 bln inflow. June's net inflow wasn't enough to cover the month's trade deficit of $49.9 bil. The total net TIC flows, including short-term assets, showed an outflow of $6.7 bln, compared to a revised inflow of $17.1 bln in May. Foreigners bought US T-bills in the amount of $12.4 bil, compared to a sale of $9.3 bil in May.
8/16/2010 7:39:21 PM
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[USD] FX Alert: What will determine outlook for JPY--Earlier this year one of the most high conviction views in the FX markets amongst some strategists was that USDJPY would end up rising as JPY began to be used as a funding currency for the global recovery. Instead USDJPY is now testing multi-year record lows (i.e. USDJPY has hit its lowest level this year after the non-farm payroll when it dipped into 85 territory). USDJPY usually trades with the US 2Yr bond yields and the Nikkei. But with US 2Yr yields at a record lows, if USDJPY is to break below 85 it will probably be on Fed moving towards QE.
8/9/2010 8:28:07 PM
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[USD] FX Alert-JULY NON-FARM PAYROLLS DECREASE -131K-The July Labor Department employment situation report revealed a decrease of -131k in non-farm payrolls, versus the revised -221k decrease that occurred in June (prev. -125k), below market expectations for a -65k decrease. This comes alongside no change in the unemployment rate of 9.5% (lowest reading since July 2009), below expectations for an increase to 9.6%. Meanwhile, average hourly earnings came in +0.2% m/m (+1.8% y/y), versus the revised unchanged m/m (+1.8% y/y) increase seen in June (prev. -0.1% m/m, +1.7% y/y). Meanwhile, average weekly hours pushed higher to 34.2 in July (up from 34.1 in June). According to the release, the headline reading was weighed down by the unwinding of census activity, reflected in a -154k decline in Federal Government jobs. Private sector jobs increased +71k, showing some improvement from the more modest gains seen in June. Overall, a mixed bag, though clearly weighed down by employment revisions (net -97k decline for May and June).
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