Welcome Prime Minister Trudeau! Canadian voters have decided he is ready to run this country!

Last week Canadians voted in a new federal government, led by Justin Trudeau, the son of former Prime Minister Pierre Elliot Trudeau. The fact that the CAD was down almost 2% on the week has more to do with the low inflation readings and soft oil prices than the rise in power of the traditional centrist Liberals. Canadians were able to cut through the negative ads by the ruling Conservatives portraying Trudeau as a good looking guy with “nice hair” that simply wasn’t ready to run a country. Trudeau made a point of pledging to run modest budget deficits for three years to kick-start the economy through investment in public transport, building affordable housing, and other infrastructure projects. Trudeau’s win may be a sign that the anti-austerity regime in Western governments is about to turn, especially since it’s becoming more and more obvious that central bank stimulus is running out of gas. All eyes will be on him and his government because if he can pull this off, it will be a road map for other governments to follow.

The US dollar index was on the cusp of breaking down from its recent ranges. However, it was not to be as a combination of rate cuts by the central bank of China and dovish jawboning by ECB President Mario Draghi help the USD bounce off support and surge higher to outperform the rest of the major currencies. The People’s Bank of China on Friday cut interest rates for a sixth time in a year after data last week showed that GDP grew 6.9% in the third quarter from a year earlier, the slowest pace in more than six years. China's central bank cut the benchmark rate by 25 bps on a one-year loan to 4.35%. The PBOC also increased the amount of money available for lending by reducing the level of reserves banks are required to hold. This was the latest signal of a major central bank's commitment to unusually low rates to try to spur economic growth.
Meanwhile on Thursday, ECB President Draghi sent his own strong signal that the bank is prepared to expand its stimulus program, which sent the euro down 2.96% on the week. Draghi outlined the options available: extend the end-date for QE purchases beyond the end of September 2016, increase the size of the QE program, broaden the types of bonds purchased, and/or lower the deposit beyond its current level of minus 0.2%. Like all global central banks, the ECB is worried about too-low inflation – inflation rates are barely above zero and far below the 2% rate that most consider optimal. Expectations are now set for more easing at its December policy meeting.

What War Hath Wrought

Currency wars are a zero-sum game. Who is eating whose lunch is an interesting question, but a more important query is whether the pie itself is growing. The ‘pie’ in this instance is essentially global GDP. Everyone would agree that the global economy moving forward is considerably diminished because the rate of global trade and integration is shrinking, which has been a key driver over the past 60 or so years. Growth has indeed slowed, but the only bump in the road we see in our rear-view mirror was the financial crisis of 2008/09. So, who is winning the currency war post-2009? Like we said above, currency wars are a zero-sum game, so nobody is winning. However, there has been a huge change in the currency landscape because earlier this month China’s yuan overtook Japan’s yen to become the fourth most used currency for global payments, brushing off a surprise devaluation in CNY to rise to its uppermost ranking ever and advancing its assertion for reserve status.

According to a report published in early October, the Society of World Interbank Financial Telecommunications (SWIFT), the proportion of international transactions denominated in yuan climbed to a record 2.79% in August compared to 2.34% in July. The icing on the cake for the CNY would be inclusion into the IMF’s twice-a-decade review of its Special Drawing Rights (SDR) basket, which is currently comprised of the USD, EUR, JPY and GBP. If the yuan does get included into the basket, it could mean as much as $1 trillion of inflows into the currency. Inclusion into the SDR would also likely promote more reform in China, and it is widely known that the People’s Bank of China Governor Zhou Xiaochuan is keen to liberalize the markets. Fingers crossed!

The only obstruction left to overcome to even loftier heights for the CNY is removing the barriers of foreign access to mainland China’s markets. According to Economists Tom Orlik and Fielding Chen of Bloomberg Intelligence:

The People’s Bank of China continues to come up with ingenious workarounds to promote yuan internationalization without capital-account opening. Rapid growth of the dim sum bond market means international investors don’t need to bring funds into China to buy yuan assets. Offshore yuan bond issuance rocketed to $270 billion in 2014, up 153 percent from $107 billion in 2013.

Swap agreements totaling 3.5 trillion yuan have now been signed between the PBOC and more than 30 other central banks. Currency swaps can be used by trade partners to cushion against a balance of payment crisis. As such, they reduce other central banks’ need for dollars and mean the yuan is already playing a role as a de facto reserve currency.

The start of Mutual Market Access between Shanghai and Hong Kong equity markets last year represented a step toward market opening. So far, its reception has been lukewarm, with more than 50 percent of the inbound quota and 70 percent of the outbound still unused.

The yuan’s astonishing progress into global markets validates President Xi Jinping’s determination to

test the supremacy of the dollar and a global economic order, which has been long dominated by Europe and the United States. China’s greatest incentive to pick up the pace of reform is to remove the hegemony of Western economies. The U.S. is very confident that it will never be dethroned has reprimanded China on and off for decades for keeping the yuan weak to boost exports, says it hasn’t done enough to dismantle controls. A more widely used currency would raise China’s influence in setting prices of commodities from oil to orange juice and give individuals and companies on the mainland more choice with what to do with their savings – not to mention her influence in global geopolitics. As the CNY makes its lengthy march to convertibility, China becomes susceptible to swings in the currency and money flows that could exacerbate its economic slowdown.

Ok CAD!

The CAD turned in another strong performance after leading the pack the previous week, however, caution is warranted after last Friday’s employment report. Like all currencies, the CAD has benefited from the US Fed’s dovish September hold. Another driver of the CAD’s advance has been the rebound in the economy. Back-to-back monthly GDP growth in June and July after five sequential months of negative or zero growth has help to cement expectations that the economy may have turned the corner and would not need any additional easing by the Bank of Canada. Of course, a discussion on the performance of the CAD would not be complete without any mention of the price of crude. Crude oil has managed to rally about 34% of its recent low in August and also managed to rise over the $50 level this past week before giving up some of its gains. Having said this, the way forward for Canada remains bumpy as evidenced by Friday’s jobs data. Canada added 12.1k jobs in the month of September, which was slightly better than expected. However, all of those gains were in part-time jobs since there was a loss of 61.9k full-time jobs, the largest amount since October 2011. That brings the loss in full-time jobs to 25K for Q3 alone. In addition, the unemployment rate rose to 7.1%, a 2-year high. This type of data warns that the rally in the CAD may sputter soon.

For the second consecutive week the USD has been the underperformer against the majors as the release of the FOMC minutes from the September meeting reinforced the dovish impression. The leaders of the pack, AUD and NZD, each managed to turn in a 4% increase on the week, powered by its own unique driver. The AUD surged higher after the Reserve Bank of Australia kept rates on hold as expected but it suggested that the bar was high for another rate cut this year. For the NZD, the story continued to be milk. Milk prices increased for the fourth auction in a row, fanning expectations that prices for New Zealand’s most important export have bottomed, which in turn takes the pressure off the Reserve Bank of New Zealand to ease again.

We had no less than six FOMC members speaking last week and even though all 6 members are considered doves, they all went out of their way to impress upon us that an interest rate hike is coming soon and that they really, really, really mean it this time. Oh really?! They’re not the only ones trying to sell us this line. Apparently 64% of the economists surveyed by the Wall Street Journal expect a hike in December. To be a little fair, some of these economists have wavered from their original position because back in August, 82% expected a hike in September. The survey also found that 23% expect the first hike will be delivered in March 2016; do we hear anyone for 2017? We wonder if any of these economists are also employed at the IMF because they just downgraded global growth to 3.1% this year from its previous forecast of 3.3%. By the way, it was the fourth time this year that they changed their forecast. Are you kidding me? Why do we even listen to these people? Apparently, we are not the only ones with this opinion. Joris Luyendijk of the Guardian wrote an eloquent piece on the science of economics, or rather the lack thereof, this weekend titled, “Don’t let the Nobel prize fool you, Economics is not a science.”

We have our doubts. We don’t see a hike at all this year or next, which falls in line with many forecasters and analysts. But hey… what do we know? We’re not going to let the fact that for the first time since 2009, all six major Fed regional activity surveys are in contraction territory. We’re also going to ignore the fact that 3-month bills sold at a yield of zero for the first time in history. That’s right, at last Monday’s Treasury auction investors decided to buy $21 billion in 3-month Treasury bills at a yield of zero. If that didn’t astonish you, demand was the strongest in over three months, as the bid-to-cover ratio, which is a widely used measure of demand, was the highest since late June, according to data from Jefferies. Don’t worry folks, interest rates can’t go much lower than zero, or can they?

The USD has been the worst performing currency since the Fed decided to leave interest rate on hold at its September policy meeting. This weakening in the USD combined with the global slowdown in growth and lower inflation due to lower commodity prices is starting to undermine the current quantitative easing (QE) programs of the ECB and the BOJ. What we mean by undermine is that the euro and yen are rising against the USD. This may cause these central banks along with other foreign central banks to ease policy even further causing the USD to rise again. If this transpires, then the Fed may have to respond in kind in order to keep the USD in check (The ECB and BOJ can’t have this, there is a currency war going on after all). Many of the bloggers in cyberspace that are calling for QE4 have it all wrong. The fact that we have had more than one QE program from the Fed only tells us that they have all failed. We think the Fed’s next move will be not a hike in rates or another QE program, but a cut in interest rates to negative. Don’t think it’s possible? Well, let’s consider that the Swiss national bank is at negative 0.75%, the ECB is at negative 0.20%, and Sweden and Denmark are also in negative territory. Also, remember the September dot plot, which showed that one FOMC member wanted negative rates at the end of 2015 and 2016. We’re guessing that was Minneapolis Fed chief Narayana Kocherlakota because in a speech last Thursday he made these following points that were summarized by Bloomberg:

 KOCHERLAKOTA SAYS FED SHOULD CONSIDER NEGATIVE RATES
 KOCHERLAKOTA: TAPERING ASSET PURCHASES LED TO SLOWER JOB GAINS
 KOCHERLAKOTA SAYS JOBS SLOWDOWN 'NOT SURPRISING' GIVEN POLICY
 KOCHERLAKOTA: TAPERING ASSET PURCHASES LED TO SLOWER JOB GAINS

We would be remised if we didn’t mention the China factor in all of this. China’s foreign exchange reserves fell another $43bn last month, suggesting continued intervention in the forex markets to support the renminbi. This was down from the $94bn they spent in August trying to shore up the renminbi after the August 11 devaluation. Should we expect the Chinese to continue to spend their reserves on stopping their currency from falling while their economy continues to sputter? Wouldn’t it help China’s economy if they allowed the currency to fall? We suspect that if the Chinese renminbi does fall it will force the Fed to react and that reaction may very well be in the form of negative interest rates.

Meet Your CSR: Q&A with David T.

You might recognize David from VBCE. Perhaps you've had the pleasure of having him serve you right before you took off for one of your eagerly anticipated vacations. Or maybe he provided you advice on how to help you save more money for your business. What you may not know are all the tiny details of what makes David so special to all of his co-workers here at VBCE.  In this month's post of 'Meet Your CSR' we asked David a few questions to help you get to know him better!

Tell us a little bit about yourself

I'm a senior CSR here at VBCE and been with the company for 7 years.  I have a wife whom I've been with for 5 years and we have a lovely daughter which is a year and a half years old. 

What thoughts come to mind when you tell people you work at VBCE?

I enjoy telling people that I work at VBCE especially when I hear that they are going on a vacation.  I tell them to come in and purchase FX from us because we have the best rates in town!

What is your dream destination for a vacation?

Bora Bora

Favorite song you would listen to on your dream vacation?

Run Away With Me - Carly Rae Jepsen

www.youtube.com/watch?v=TeccAtqd5K8

If you could take one person on a dream vacation with you, who would it be?

My Wife

Tell us about a stand out customer that you have previously helped out

I had a customer who was selling a couple of 100 oz Silver bars to purchase an old Mongolian ring.  He said it was owned by Kubla Khan and he would bring it in and show me once he got it.  So a few weeks past by and he kept his promise and came all the way downtown just to show me the Kubla Khan ring that he had just bought.  I was pretty fascinated with everything he told me about the ring.  He mentioned that its had a 3 dimensional drawing with a story behind the ring which I found very interesting.  I also showed the ring to my fellow Mongolian co-worker who was very impressed!

Give us a forex tip every savvy customer should know

I would suggest customers to do some research before they head on their trip so they know who much currency to bring on their trip. Example: How much is the average breakfast, lunch and dinner? Budget to spend per day? How much is cab/bus/train fare?

What is your favorite piece of bullion that you have ever come across?

My favorite bullion that I've came across is this year of the Dragon Lunar silver coin.

Water on Mars

The Canadian Dollar was the best performer last week relative to the greenback despite only a moderately positive GDP month-over-month. The real reason for the appearance of loonie strength is the fact that you can’t have a winner without a loser, and last week the greenback and Pound Sterling took the booby prizes.

The recent surge of GBP sell-off is likely being driven by the widening gap between the expected timing of the Fed rate hike and BoE’s rate hike, rather than the gradual deterioration of the UK’s economic outlook.

Noteworthy events this week include the annual Conservative Party conference which may hint at a potential date for their EU referendum. For those of you that don’t know, the UK is set to have a referendum by the end of 2017 on whether or not to remain a member of the European Union. Generally, big businesses are showing support to remain in the EU because it makes it easier for them to move products, people and money around the world. Others disagree, suggesting that an EU exit would allow the UK to negotiate trade deals as one country and not just one of 28. The British Chambers of Commerce indicated that 55% of members are backing staying in a reformed EU.

Last week, virtually any data that could suggest a growing U.S. economy was negative, including non-farm employment which came in at a disappointing 142K in contrast to the forecast of 201,000. The unemployment rate came in at 5.1% - unchanged and, hourly earnings were no good at 0.0% month-over-month. Finally, the labour force participation rate dipped to 62.4%, the lowest level since October of 1977.

A slowdown in overseas markets, a stronger dollar and lower oil prices have been hampering exports and manufacturing may be the reason why employers are hesitating before hiring more staff. Companies across the U.S. are increasingly reporting fallout from the strong U.S. dollar and slowdown in Asia. Those concerns are expected to draw heightened attention as firms begin announcing third-quarter earnings.

From WSJ

Most markedly however, this has vindicated the FED’s decision to delay an interest-rate increase last month. The central bank, which hasn’t raised rates since 2006, held off in September mainly due to worries about global weakness dwindling the U.S. economy’s strength. But the fact remains, we know Yellen wants to raise rates and, we know she will, but this data says not just yet… Perhaps the Fed will raise rates before they find water on Mars. Oh wait, NASA found that last week – or something to that effect.

In fact, the economic slowdown suggests we may not see a rate hike until January (not in October or December), and since the FED alluded to a gradual raise in borrowing costs, the hikes could continue well into 2017.

Eurozone Growth is Waning

 Final Eurozone Composite Output Index September:
53.6 (Flash 53.9, August 54.3)

 Final Eurozone Services Business Activity Index September:
53.7 (Flash 54.0, August 54.4)

The Eurozone economy continued to make steady progress in September as solid gains in output and new orders supported further job growth. However, the rate of activity grew at its weakest pace at a 4-month low. The average rate of expansion over Q3 failed to accelerate and instead equalled Q2 4-yr high. On the bright side for the European Central Bank, service firms raised prices for the first time in 4 years. Overall, the Eurozone expanded only 0.4% in Q3.

European companies slowed their pace of hiring as new business orders cooled off in Q3. Several ECB policy-makers, led by ECB President Mario Draghi, have publicly suggested in the past that the trillion EUR stimulus programme could be extended if inflation targets of 2% are not achieved. Those voices got louder last week after official data showed that Eurozone inflation slipped below 0% in September.

According to Reuters, “A [Reuters] poll last month predicted the ECB would officially extend its asset purchase program beyond September 2016 in yet another attempt to drive up inflation and rekindle growth and those calls probably grew louder after official data showed euro zone inflation slipped below zero again in September.”