Turning the corner?

The price action in the CAD and the GBP have demonstrated that a change in trend has occurred. The CAD had dropped for the first 12 trading days of the year. On Wednesday the losses stopped and the CAD went up for 3 straight days. The combination of the turnaround in the equity markets on Wednesday, the decision to stand pat on monetary policy by the Bank of Canada (also on Wednesday), and the 3 straight days of gains in crude oil (10.85% on the week) help cement the interim bottom in the CAD. Wait a second, I know what the regular readers of our blog are thinking right now – didn’t we say last week that the CAD had the potential to reach the 1.60 level due to the bust of the commodity super cycle? Yes we did and that is why we are calling last week’s bottom in the CAD as an interim bottom. Time will tell if this is the beginning of a correction before going to 1.60 or if it is a change in trend – the price action will determine that.

The price action in the GBP was also indicative of a turnaround. The GBP had steadily declined from the 2.090 level in early December until the about face in mid-week which broke the prevailing momentum. To further demonstrate this point, the GBP traded sharply higher on Friday despite a fall in retail sales that was three times larger than the consensus expected. When a currency rallies despite bad news this tells us that change is afoot.

Looking ahead, it will be another busy week in the currency markets. Along with the various economic reports due to be released, the central banks of Japan, New Zealand, and the USA will deliver policy announcements. No moves are expected by all three banks but if there is to be a move it will come from the Reserve Bank of New Zealand which could cut by a quarter point. After delivering its first rate hike in a decade, the Federal Reserve is not expected to make a move. However, it would be a total surprise if the FOMC statement did not contain a hint of concern over the recent volatility in equities and commodities. If it does then the USD will take a hit.

Congratulations to Dreamcatcher Meadows - Lordsley DMV places 4th (HOY)!

Dreamcatcher Meadows

Working Farm with Big Heart Attribute  Their Unparalleled Success to Unique Team; Overall Champion Sporthorse Breeder Title Third Consecutive Year – 2015 Adequan/USDF Annual Gala & Awards Banquet, Las Vegas

Dreamcatcher Meadows Ventures Ltd.(“DMV”), the unique sport horse breeding and training centre nestled in the Pemberton Valley near Whistler BC, captured a series of major equestrian sport titles, as well as declared 2015 Champion Adequan/USDF Sport horse Breeders of the Year – for the third year in a row!.  The top five home bred and trained horses, most owned by loyal sponsors, along with energetic residential teenagers, make up the  “team” earning awards so numerous a further surprise honour was presented by Dr. Ludwig Christmann, International Director of the Hanoverian Verband, travelling from Verden, Germany  to these elite equestrian awards in Las Vegas. Dr. Christmann presented both the owners of the hard-working farm Jill Giese and John Dingle and its primary sponsors , Leroy “Bus” Fuller and family (Earls and Joey Restaurants owning Ballerina DMV, Dancier’s Dream DMV, Wunderbar DMV, Wishing Star DMV and World Ruler DMV) with “Ehrenurkunde”, the state society certificates of recognition signed by the President, recognizing the  exceptional contribution recipients to sport horse breeding and competition with their Hanoverian breed horses. The top five horses also include DMV owned Equimat North America (sponsors od Highest Scoring Horse of the Year Leopold DMV and top three year old D-Trix DMV) and Tony Ma, President, Vancouver Bullion and Currency Exchange, owning the stunning stallion Lordsley DMV. (See awards list below)

John Dingle and Jill Giese, co-founders of the idyllic mountain valley farm, have devoted the past twelve years to turning a run-down cattle ranch into aptly named Dreamcatcher Meadows, ultimately providing horse services “from conception to competition”.  The pair attribute their meteoric success to their corporate sponsors.  DMV is seeking sponsorship for Leopold and D-trix, potential team talent for international competition. “We would rather not sell them and produce them for a Canadian to ride representing Canada – with a Canadian born and trained star.“ Obviously popular with two VIP tables of supporters at the Las Vegas awards, the Canadian breeding team won top spot by a large margin (97 points with 2^nd at 65!) against breeding operations owned by multinational corporations.

DMV Awards

 Perpetual Trophies

THE STALLION EXPO TROPHY  awarded to Adequan/USDF Dressage Sport horse Breeding Breeder of the Year ( Open to all breeders in  North American competing in USDF Breed and Material divisions. Points attributed based on up to five home bred horses placings in their individual age and sex group eg. Home bred Champion Material division earns 15 points, Reserve 14 points,etc.)

   Champion - DREAMCATCHER MEADOWS VENTURES LTD;  wins this honour for third year in row with 96 total points won by homebreds”  based on          scores of top five home bred horses earning Horse of the Year placings.

Leopold DMV, Lordsley DMV, D-Trix DMV; Ballerina DMV and Dreammaster DMV; Res Ch. Maurine Swanson 69 pts.

THE SUNSHINE SPORT HORSE ASSOCIATION TROPHY –  awarded to Adequan/USDF highest scoring overall (3,4 & 5 year old THE SUNSHINE SPORT HORSE ASSOCIATION TROPHY - Highest Scoring Champion of all Material Champion

  s Overall

Champion is 4 year old Leopold LEOPOLD DMV , ridden & trained by John Dingle; owned (and for sale) by Dreamcatcher Meaows (Ballerina DMV was Champion all three years eligible when 3 , 4 & 5 years old)

Horse of the Year Awards ( (HOY )  (Top five placings of qualified horses in same age/sex division)

Material  (young horses ridden)

 Champion-Champion  Leopold DMV Median score  Stalllions & Geldings Materiale combined ages 4/5. Median score 87.1%

            Champion- D-Trix DMV Owner DMV Ltd; Rider: John    Dingle 3 year old Stallions/Geldings Materiale ; Median 82.7

            Res. Champion Ballerina DMV/ Mature Maiden mares

; Sponsored by Earl’s and Joey Restaurant fgri=ounder. 

Res. ChampBallerina DMV/ Mature Maiden mares

Mature Stallions Sporthorse Breeding

4th --Lordsley DMV-.  Owner:  Tony Ma, Vancouver Bullion & Currency Exchange;  – Median 80.9

            5^th Dreammaster DMV- Owner: John Dingle  Median 80.1

Geldings 3 year old

            3^rd D-Trix DMV

2015 Year End All Breed CHS (CHS) Awards Summary

(11 medals)

Owners:  Bus & Riki Fuller (3 Medals)

Dancier’s Dream DMV: USDF All-Breeds CHS Training Level Open Champion: Owner:  Bus and Riki Fuller Scottsdale Arizona;

BREEDER:  DREAMCATCHER MEADOWS VENTURES LTD. PEMBERTON BC

Wishing Star DMV: USDF All-Breeds CHS: DSHB Yearling Filly Champion;

 Owners:  Bus and Riki Fuller, Scottsdale Arizona;

BREEDER:  DREAMCATCHER MEADOWS VENTURES LTD. PEMBERTON BC

Wunderbar DMV: USDF All-Breeds CHS DSHB 2 year old Colts & Geldings Champion;

Owner: Shelley Evans; 

BREEDER:  DREAMCATCHER MEADOWS VENTURES LTD. PEMBERTON BC

Owner Tony Ma, President, Vancouver Bullion & Currency Exchange; Breeder DMV Ltd. ( (accepting on behalf of Mr. Ma

Champion Lordsley DMV: USDF All-Breeds CHS 4 /5 Stallions & Geldings Material

Reserve Champion; ES Dreammaster DMV, Owner DMV Ltd.

Owner:  Shelley Evans (1 medal)

Wonderful Dream DMV: USDF All-Breeds CHS: 3 year old Fillies Material Champion;

Owner: Shelley Evans Revelstoke BC;

 BREEDER:  DREAMCATCHER MEADOWS VENTURES LTD. PEMBERTON BC

Owners: Dreamcatcher Meadows Ventures Ltd.  (4 medals)

D-Trix DMV: USDF All-Breeds CHS 3 year old Colts & Geldings Material Champion;

USDF All-Breeds CHS DSHB 3 year old Colts & Geldings Champion;

Owners: DMV  Ltd

BREEDER:  DREAMCATCHER MEADOWS VENTURES LTD. PEMBERTON BC

Leopold DMV: USDF All-Breeds CHS 4 – 5 year old Stallions & Geldings Materiale Champion.  

Owners:  DMV  Ltd.;

BREEDER:  DREAMCATCHER MEADOWS VENTURES LTD. PEMBERTON BC

Westminster DMV: USDF All-Breeds CHS DSHB 2 year old Colts & Geldings Reserve Champion;

Owners: DMV Ltd.;

BREEDER:  DREAMCATCHER MEADOWS VENTURES LTD. PEMBERTON BC

A crucial Bank of Canada policy meeting in the week ahead...

Just as the previous week, risk aversion ruled last week causing traders to reach for their TUMS antacid. Some $5.7 trillion has been wiped off the value of world stocks in the first two weeks of the year. For the second week in a row the Japanese yen was the top performer. As we mentioned last week, the media incorrectly characterized the increase in the yen value due to it being considered as a safe haven flow, which it is not. The strengthening of the yen simply reflects the unwinding of the carry trade. The worst performer was the CAD which was dragged down by the nearly 10% drop in the price of crude last week.

The markets continue to be frazzled by slowing US and global economic growth (US 4Q GDP tracking 0.6%), collapsing commodity prices, renewed fears about China, heightened geopolitical tensions (Middle East, North Korea, etc.), and the first transition to Fed policy tightening in a decade.

With a crucial Bank of Canada policy meeting in the week ahead, we wanted to look at commodities and the CAD. The slowdown in China and the sluggish global economy has caused a collapse in commodity prices. This in turn has weighed on the commodity currencies of New Zealand, Australia, and Canada.

Whatever happened to the “commodity super cycle”? Wasn’t it supposed to last between 15 to 20 years? It can be debated whether the commodity super cycle started in 1998 or 2002; notwithstanding, the low in the CAD in 1998 was around the 1.59 level while in 2002 it was around the 1.61 level. We point this out because if you accept that the super cycle has indeed ended, then wouldn’t it be logical for the CAD to return to the level that the cycle began at, which was around 1.60 level?

The Bank of Canada policy announcement is on Wednesday January 20th. If you recall, a year ago the Bank of Canada surprised the market with an interest rate cut at its January 2015 meeting. We don’t think anybody will be surprised if the BOC makes a move at this meeting since the economy and Canada’s number one export, crude oil, are both reeling. The only surprise may be in the form of stimulus taken by the BOC. Governor Poloz has suggested on more than one occasion that he would consider an asset purchase program, i.e. Quantitative Easing (QE). Launching QE while the current bank rate is at 50 bps is not unprecedented, that’s exactly what the Bank of England did when it started its current QE program. The market is expecting a rate cut and if that occurs then the CAD may actually bounce higher in the short term as this option is already discounted. If the BOC opts for QE then the currency could fall more due to the money printing characterization of QE. No move at all by the BOC could inject even more volatility and losses for the CAD as it would be seen as the BOC being behind the curve. Whatever the move, the path of least resistance for the CAD in 2016 will continue to be downward; therefore, companies with CAD receivables or USD payables should hedge their exposure while companies with USD receivables or CAD payables could stay the course in the spot market.

Poorly communicated and executed

The biggest driver in the currency market last week was not monetary policy divergence but rather risk aversion caused by outright fear. Risk aversion went into high gear on worries over a China slowdown, sheer panic in the Chinese stock market, a sharp drop in the Chinese Yuan adding to current disinflationary macro environment, and uncertainty around further FOMC interest rate hikes in 2016. The global ramifications of all this led to stocks being sold around the world causing carry trades to be unwound thereby making the Japanese Yen the top performer. In fact, it was the biggest weekly gain in the Yen against the USD since August 2013.  The media always seems to characterise the unwinding of the Yen carry trade as a safe haven move, which it is not. The carry trades is a strategy in which an investor borrows funds in a currency with a relatively low interest rate such as the Yen and Euro, due to its current negative rates, and the converting and investing of those funds into a currency yielding a higher interest such as the AUD and NZD. The big moves in the currency market last week was due to the unwinding of the carry trade which caused the AUD and NZD to be sold so that loans in the Yen and Euro could be paid back.
 The week started with news that Saudi Arabia executed a prominent Shiite Muslim cleric during a mass execution of 47 people. This ignited a regional rivalry between Iran and Riyadh injecting volatility into oil trading. This was quickly followed by the worse than expected Caixin  Manufacturing PMI for China falling to 48.2 from 48.6 in November, which was down for the 10th straight month.  This revived the China slowdown fears causing stock markets across Asia to fall. Circuit breakers kicked in after sharp selloffs but by the end of Monday the Shanghai Composite fell nearly 7% and the Shenzhen Composite lost 8.25%. This in turn ignited fears of greater Chinese stock market losses as investors feared that the ban on sales by larger investors, which was scheduled to be lifted at the end of the week, would be extended. That 6-month ban had been imposed at the height of the Chinese stock market crash in August.

As one might imagine, heavy stock market losses caused the Yuan to weaken and the spread between the onshore and offshore Yuan to widen. At one point, the spread hit its widest level in more than four years after the central bank was suspected to have intervened in the onshore market to support the currency. It's also important to remember that prior to the big August devaluation, the two rates traded at virtually the same level. The difference between the onshore (CNY) and offshore (CNH) market is due to China's wish to try to internationalize its currency. As China began to open its economy, it wanted its currency to be used in the international market to settle trade and financial transactions, without however fully opening up its capital account. The drawback with this dual system is that offshore Yuan is free to trade in the open market while the onshore Yuan fluctuates within a tight band under the control of the monetary authorities. Thus, as the offshore Yuan sold off the central bank of China was forced into intervening in the onshore market to stop the currency from falling too quickly. The bottom line is that the gap implies that external market participants (international investors) are pricing in further weakening of the onshore Yuan.

When the western media sees the Yuan falling they are quick to jump on the devaluation theme with their headlines charging that China is devaluing the Yuan in order to boost its sagging exports.  Buried deep in their articles is the fact that China is spending its reserves to slow down the fall in its currency in order to combat capital flight. Data on Thursday showed China's foreign exchange reserves fell by the most on record last month, down $108 billion in December alone and by $513 billion overall last year. This is a serious rundown in reserves and it cannot go on forever. The depletion in reserves causes monetary tightening, which in turn compounds their economic downturn. In theory, China could cut the reserve requirement ratio for banks (RRR) from its current 18%. This would ease monetary policy but it would also weaken the currency, which in turn would accelerate capital flight. China is trapped in a vicious circle - no country can have an open capital account, a managed exchange rate, and sovereign monetary policy - something must give.

As if market sentiment wasn’t fragile enough, the US Geological Survey detected an unusual 5.1magnitude tremor near a known North Korea nuclear test center. The North Korean regime announced it had successfully carried out its first underground test of a hydrogen bomb - a weapon much more powerful than an atomic bomb. Even though many experts discounted these claims, the test was enough to fan more panic and risk aversion.
By Thursday, China allowed the biggest fall in the yuan in five months sending global stock markets
tumbling as investors feared it would trigger competitive devaluations. And for a second time during
the week, another 7% crash in Chinese stocks in the first 30 minutes of trading caused circuit breakers to kick in and suspend trading for the rest of the day. It became very clear that the ending of the 6-month sales ban for large investors and the new circuit breaking mechanisms for halting trade in volatile markets were feeding on to itself by creating panic. It took a while, but authorities finally realized what was happening and they responded by abandoning the new circuit breaking mechanism and by replacing the sales ban with a less severe rule – large investors would be restricted from selling more than 1% of a listed company's share capital every three months. 

These measures finally helped to calm the markets; however they were poorly communicated and
poorly executed. In our opinion, Chinese financial markets lack a face – someone market participants can turn to for answers. In a well-developed market like in Canada, USA or the Eurozone, market participants can turn to a Stephen Poloz, Janet Yellen or Mario Draghi. They do a very good job of communicating their intentions. China doesn’t have a person that does this; they set out their intentions with press releases, which just doesn't cut it in a time of panic.

China could soothe markets by clearly communicating their monetary objectives. They need someone to say something like this – the central bank of China is in the process of normalizing monetary policy by slowly allowing interest rates to fall. The word "normalizing" would show that it is on the same page as the US Federal Reserve since they are normalizing their monetary policy by slowly allowing interest rates to rise. They could remind the markets that the Yuan has gained by about 30% on a trade weighted basis since 2011 and for the current state of their economy the Yuan is overvalued. China is in the midst of an economic slowdown and they are trying to engineer a transition from an export mercantile based economy to an internal consumer driven based economy that requires monetary easing. This, of course, will weaken its currency against countries that have a neutral or tight monetary policy. If they could have someone consistently bang out that message then fear over opportunistic devaluations would be dispelled and there would be less volatility in all markets.

       

 

    

Annual Round-up

The CAD was the worst performing currency of 2015 as it lost over 16% on the year while making 11- year lows. The Canadian economy suffered a technical recession in the first half of the year. The Bank of Canada responded with two interest rate cuts early on which seemed to help the economy get back to at least flat growth. The biggest culprit, as you can pretty well guess, was the crash in the price of oil. Unfortunately, the price of oil has not bottomed yet. With the Iranian sanctions coming to an end, more oil will be added to the current supply glut, which is also increasing thanks to the mild winter season in North America due to the warm El Nino weather pattern. With oil currently trading around the $37 handle a fall to $20 could be in the cards. If the price of oil does fall further don’t be surprised if the Bank of Canada offers up more interest cuts and possibly unconventional policies such as negative rates and/or QE, if things really go downhill. As we have seen with other central banks, dovish monetary easing doesn’t necessarily translate into an increase in a country’s exports especially when the world is struggling with insufficient global demand – thus some central banks have been forced into the use of unconventional policy tools.

The USD powered ahead for the first three months of 2015 on the premise that the U.S. Federal Reserve was getting ready to raise interest rates while the rest of the world was just kicking off another round of monetary easing. While this monetary policy divergence was well telegraphed, and thus easy to prepare for, it was the unexpected moves that caused the most damage. The breaking of the Swiss franc/euro peg in January and the Chinese yuan devaluation in August caused market participants undue stress and reminded everyone that forex markets are not for the faint of heart. 

Come to think of it, the policy divergence theme was also full of false starts as the Fed tied any rate increases to economic improvement amid signs of an inconsistent recovery. The market was blindsided when the Fed downgraded its predictions for U.S. growth and inflation at the March FOMC meeting instead of raising interest rates for the first time since 2006, sparking a selloff in the USD. This sapped the momentum from the US dollar index as it peaked in March and fell prey to false starts after each of the next four meetings. The second last meeting of the year in October was the turning point for the USD as it gained strength in anticipation of a December rate hike. Unfortunately, the USD was side swiped once again after ECB President Mario Draghi under delivered at the ECB policy meeting. A massive short squeeze in the EUR/USD ensued, which temporarily put a dent in the divergence theme. This helped to temper the market’s reaction to the Fed’s rate hike in December.

There is no question that the USD was the top performer of 2015, led by the divergence in monetary policy between the Fed and the rest of the main central banks. Now that the Fed has its first rate hike under its belt it is looking to make four additional hikes in the year ahead. The Fed will have more hawks in the birdcage in 2016 so the case for monetary tightening and a higher USD can easily be made. However, the divergence case may have a short shelf life since we think that the global easing cycle is nearing an end. How this plays out remains to be seen as each of the other central banks and foreign governments will have their say as well. Let us take a brief look at the majors.

The Japanese yen was the best performing currency after the USD. The yen was sought after as a safe haven during geopolitical events such as the Paris terrorist attacks. It also remained strong because the Bank of Japan did not find the need to offer any new easing policies. At this point, the only way we see the BOJ adding to its easing bias is if the fallout of the Chinese slowdown takes a turn for the worse. As we will shortly see, this wild card will be in play for many of the world’s central banks.

The one thing we can say for sure about the National Bank of Switzerland is that they are not ready to throw in the towel on keeping their currency from appreciating. They may change the goal posts from time to time, like they did in early January, but they are not about to quit. The biggest threat to currency appreciation would be a slowdown in the Eurozone economy which would cause the ECB to act again. Thus, the central bank could go further into negative rates if the circumstances warrant it.

The UK economy was one of the best performing economies in the first half of 2015 which caused many to believe that the Bank of England would be the second major central bank to raise interest rates. However, the economy tailed off in the second half of the year as the commodity sector continued to crash causing the market to push out the BOE’s interest rate hike. The greatest risk to the GBP in 2016 is the threat of Brexit - "British exit". Brexit refers to the possibility of Britain's withdrawal from the European Union. Prime Minister Cameron has promised a referendum but no date has been set as of yet. Leaving the EU would have an enormous economic impact on the UK economy, thus Brexit is a black cloud over the future.

The euro was down about 10% for the year but was able to hold its March low prior to the December ECB meeting which caused it to move up on a classic short squeeze. The fact that the Eurozone continues to struggle after the great financial crisis of 2008 and the European Sovereign debt crisis of 2010 is not surprising and only reinforces the problems with a currency union. The biggest drawback of the union is that they only share a currency but not revenue and taxation policies. Be that as it may, the ECB has done what it can to stimulate growth and it will continue to do so in 2016, considering it was the last one to the global easing party. Geopolitical risks in the Ukraine and the Middle East will continue to be the black clouds over the Eurozone in 2016.

The AUD and NZD were down 10.72% and 12.35% respectively for the full 2015 year. However, those numbers are misleading because for the last 3 months of 2015, the NZD and AUD were the top performing currencies with gains of 6.76% and 3.87% respectively. These gains came despite continued commodity price pressures in Q4 2015. In the first nine months of the year, the two commodity currencies struggled due to the high USD and the slowdown in the Chinese economy. The central banks of both countries responded with interest rate cuts and good old fashioned jawboning. By the time the fourth quarter started, both banks made it abundantly clear that they were satisfied with their country’s economic progress signalling the end of monetary stimulus. Coupled with a bottoming of key commodity prices for each country in the month of December - dairy for New Zealand and iron ore for Australia – the way was cleared for a rally into year-end for both currencies. The key for each currency in 2016 will be the performance of the Chinese economy. If China continues to sputter than both currencies will suffer. On the other hand, if China begins to turn the corner then both currencies will finish 2016 on a positive note. In either case, the NZD should outperform its commodity brethren, the AUD, due to its greater exposure to the Chinese consumer in the form of soft commodities (food) rather than hard commodities which are more geared to the investment and infrastructure side of the Chinese economy.

So there you have it, a brief synopsis of each of the key currency majors that we follow. We have taken for granted that we have entered into the second phase of monetary policy divergence. This phase will be marked by interest rate hikes by the Fed while other central banks stand pat or extend easing. It will be interesting to see how long this divergence lasts, considering that on the surface; it would seem that we are closer to the end of the global easing cycle rather than the middle. Once the Fed hints that it is close to ending its course of rate hikes then and then will the USD crest and turn downward.