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.