It's Official: Canada is in Recession

It’s Official: Canada is in Recession

From Business Insider:

Canadian gross domestic product unexpectedly fell 0.2% in May. This was worse than the 0.0% expected by economists.

"The economy has contracted in six out of the last seven months," BNP's Derek Lindsay noted. The resource-rich economy has felt the crushing pain of falling commodity prices as global demand for raw materials has decelerated. And relief doesn't seem to be coming anytime soon.
"We continue to see falling commodities prices weighing heavily on the economy, with mining, utilities, and manufacturing presenting biggest drags on the goods side," Lindsay said. And this probably means more easy monetary policy.

"The Bank of Canada is likely to read this report as supportive of their move to cut rates at their last policy meeting earlier this month," Lindsay added. "We expect further easing ahead, as investment and exports remain in contractionary territory and the economy remains vulnerable to a correction in housing and a pullback in spending due to high levels of household debt."

Here are the specific details from Stancan:

Manufacturing output contracts

Manufacturing output contracted 1.7% in May, following no growth in April.
Durable-goods manufacturing fell 2.4% in May, as almost all major groups lost ground. Notable declines were recorded in machinery, computer and electronic products, fabricated metal products and miscellaneous manufacturing. Non-metallic mineral products manufacturing was up.
Non-durable goods manufacturing was down 0.7% in May, primarily because of declines in the manufacturing of food as well as beverage and tobacco. Decreases were also posted in textile, clothing and leather manufacturing, chemical manufacturing as well as printing and related support activities. The manufacturing of petroleum and coal products and of plastic and rubber products advanced.

Mining, quarrying, and oil and gas extraction falls again

Mining, quarrying, and oil and gas extraction fell 0.7% in May, down for a seventh consecutive month.
Oil and gas extraction fell 1.0% in May, after decreasing 3.4% in April, mainly as a result of a decline in conventional oil and natural gas extraction. Non-conventional oil extraction was also down.
Mining and quarrying (excluding oil and gas extraction) was down 0.8% in May. A decline in metallic mineral mining outweighed a gain in coal mining. Non-metallic mineral mining (which includes potash mines) was unchanged in May.
Support activities for mining and oil and gas extraction increased 2.8% in May, after rising 9.6% in April, as both drilling and rigging services advanced again. The gains in April and May followed double-digit declines in the first three months of the year.

Wholesale trade falls while retail trade rises

Following a 1.6% gain in April, wholesale trade fell 1.0% in May. Declines were notable in wholesaling of machinery, equipment and supplies, miscellaneous wholesaling (which includes agricultural supplies) as well as motor vehicle and parts wholesaling. On the other hand, food, beverage and tobacco wholesaling and farm products wholesaling were up.
Retail trade rose 0.5% in May after a 0.3% decline in April, led by increases in the activities of building material and garden equipment and supplies dealers as well as electronics and appliance stores.

Construction grows

Construction grew 1.0% in May, as engineering and repair construction as well as residential and non-residential building construction advanced.
The output of real estate agents and brokers rose 2.1% in May, up for a fourth consecutive month.
Finance and insurance sector declines
The finance and insurance sector declined 0.3% in May. A decrease in banking services outweighed increases in financial investment and insurance services.

Other industries

Utilities declined 1.4% in May, down for a third consecutive month. Electricity generation, transmission and distribution as well as natural gas distribution were both down in May. Unseasonably warm weather was recorded in some parts of the country in May.
The public sector (education, health and public administration combined) edged down 0.1% in May. Declines in educational and health care services more than offset an increase in public administration.
Accommodation and food services were up 0.9% in May, in parallel with an increase in the number of overnight travelers to Canada.

Need even more evidence?

Here are Five stages of death of the Canadian dollar according to the Globe and Mail which include Denial, Anger, Bargaining, Depression and finally Acceptance...

From BMO deputy chief economist Michael Gregory and senior economist Benjamin Reitzes:

"With a view to final trimester Fed tightening this year, unmatched by the BoC, we look for the currency to continue to depreciate, averaging C$1.33 in October [meaning about 75 cents]. Political uncertainty heading into the Oct. 19 federal election and continued global oil price volatility (but along sideways trend) should reinforce the weakening trend. Presuming the absence of post-election policy uncertainty and more oil prices, we look for the Loonie to average a cent or so stronger by 2015-end."

Other news...

The top performing currency last week was the Pound Sterling (GBP) but the excitement builds this week as we may see further gains in anticipation of the three PMI’s; Construction, Manufacturing and Services. In addition, it will be the first time the Bank of England will simultaneously release its policy decision, the meeting minutes, the votes and their new macroeconomic forecasts. Early last month BoE Governor, Mark Carney, had stated that, “the British economy's strong momentum meant the decision on when to raise rates would come into sharper focus around the end of this year.” Therefore, there is a strong possibility that there will be at least one vote for an interest rate hike.

The worst performer last week was the Swiss Franc (CHF). The SNB, Switzerland's central bank, reported a loss of 50.1 billion CHF on Friday due to a policy change. Per Business Insider, the bank's foreign currency reserves underwent a major devaluation when it decided to abandon a policy to cap the value of the franc against the euro earlier this year. Since the SNB had been buying Euros to maintain an exchange of 1.20 Swiss Francs to the Euro, it pushed up the value of the Franc, devaluing the recently bought Euros.

If you’re wondering why the US Federal announcement had little impact on the on the market last week, it might be because “staff projections prepared before the June 16-17 policy meeting were inadvertently included in a computer file that was posted to the Fed’s website on June 29.”
How’s that for a spoiler! The projections saw the federal-funds rate averaging 0.35% in Q4 of 2015, then rising to 1.26% in Q4 of 2016 and finally 2.12% in the fourth quarter of 2017. That’s one hike this year and potentially four next year. The actual statement however was quite lack luster, as the central bank only made small changes to its monetary policy, being very careful not to suggest when exactly they will raise interest rates this year; September or December. A September hike is the heavy favorite among banks, analysts and traders alike, but they may have missed something…

VBCE Daily Foreign Exchange Update for Tuesday, Jan. 27th, 2015

USDCAD tests 1.25 and then falls to 1.2380/85

USDCAD spot rate: 1.2390 - 1.2395 (AS AT 8:15AM PST)

RANGES:	Asia:	1.2470	to	1.2495
	Europe:	1.2442	to	1.2502
	North America:	1.2475	to	1.2475

Technical Support / Resistance:

S2	S1	R1	R2
1.2200	1.2314	1.2504	1.2713

Key Economic Data Releases:

-U.S. durable goods orders: -3.4% (exp. 0.5%) ex transportation: -0.8% (exp. 0.6%)

-U.S. Markit services purchasing managers index: 54.0 (exp. 53.8)

-U.S. consumer confidence: 102.9 (exp. 95.1)

-U.S. new home sales: 1.032 million (exp. 0.450 million) % change: 11.6% (prev. -6.7%)

-U.S. Richmond Fed manufacturing: 6 (exp. 6)

Key Event Calendar:

DATE	CANADA	U.S.A.
Jan. 28		Fed interest rate decision
Jan. 29		Jobless claims, pending home sales
Jan. 30	GDP	GDP, consumer sentiment index

Yesterday, USDCAD traded from 1.2420 up to 1.2475 before falling back to 1.2405/10 in North American trading. The move lower was short-lived with USDCAD bouncing back towards 1.2464. The pairing continued higher overnight reaching the 80 cent mark (1.2500) before falling back to 1.2475 at the North American open. Weaker than expected U.S. durable goods data and general market weakness (EURSTOXX down 1.53% / DJIA down 300pts.) has resulted in broad-based USD weakness as the market awaits tomorrow’s U.S. Fed announcement. USDCAD has fallen to 1.2380/85 matching last Friday’s post Canadian data low. We’ve seen a minor bounce back towards 1.2407. The EURO is the top performer extending its post Greece election gains to 1.1422 – up two cents on the day. Currently, the TSX and the DJIA are down 0.80% and 2% respectively. EURCAD is up 0.70% trading between 1.4010 and 1.4148. GBPCAD is up 0.25% trading between 1.8764 and 1.8894. JPYCAD is unchanged trading between 0.01052 and 0.01060. Gold is up 1% trading between $1,272 and $1,297USD/oz, silver is up 1% trading between $17.55 and $18.20USD/oz, while oil is up 0.80%, trading between $44.65 and $45.72.

 

USDCAD breaks above 1.1900 / posts new 5.5 year high

 

 

VBCE Daily Foreign Exchange Update for Monday, Jan. 12th, 2015

USDCAD spot rate: 1.1923 - 1.1928 (AS AT 8:07AM PST)

RANGES:	Asia:	1.1836	to	1.1865
	Europe:	1.1840	to	1.1886
	North America:	1.1878	to	1.1938

Technical Support / Resistance:

S2	S1	R1	R2
1.1671	1.1800	1.1984	1.2200

Key Economic Data Releases:

-U.S. labour market conditions index: 6.1 (prev. 5.5)

Key Event Calendar:

DATE	CANADA	U.S.A.
Jan. 13
Jan. 14		Retail sales, business inventories
Jan. 15		Initial jobless claims, producer price index
Jan. 16		CPI, industrial production, consumer sentiment

On Friday, USDCAD traded from 1.1805 up to 1.1890 before easing to close the week at 1.1866. The USD and the CAD were the worst preforming currencies on Friday. Although the U.S. added more jobs than expected including a large revision to November’s data, many of the jobs were of the lower paying / part-time quality. On the other hand, Canada added 53,300 full time jobs while losing 57,700 part time jobs. Overnight during the Asian session, USDCAD eased lower to 1.1836 on broad-based USD weakness. The pairing reversed course testing Friday’s post-employment data high during the London session. With oil losing nearly another 5% today, USDCAD has broken above 1.1900 and has made gains to 1.1940, its highest level in 5.5 years. Currently, the TSX and the DJIA are down 1.34% and 0.25% respectively. EURCAD is up 0.35% trading between 1.4004 and 1.4116. GBPCAD is up 0.50% trading between 1.7925 and 1.8080. JPYCAD is up 0.45% trading between 0.00996 and 0.01007. Gold is up 1% trading between $1,217 and $1,231USD/oz, silver is up 0.71% trading between $16.43 and $16.68USD/oz, while oil is down nearly 5%, trading between $45.93 and $48.24.

Sources: Reuters, Bloomberg, FXStreet, RBC Capital Markets, Bank of Canada, U.S. Federal Reserve, CNBC, Forexlive

 

Looking Ahead to 2015 / Weekly Market Dispatch January 5

 

Looking Ahead to 2015

 

 

The USD finished 2014 on a high note, making highs that it hasn’t seen since the onset of the 2008 credit crisis. On the first day of trading on January 2nd of 2015, the USD picked up where it left off powering its way higher against all currencies. The dominant support behind the rise in the USD continues to be the “divergence theme” – a U.S. economy growing at a 4% clip and a central bank ready to deliver an interest rate hike by mid-year, while additional stimulus is required in the rest of the world. We expected this divergence to remain in place for at least the first quarter of the year. After that we will reassess to see if the deflationary risk of lower commodity prices, especially crude oil, and a higher USD cause a slowdown in the U.S. economy, and thereby cause the Fed to reassess the timing of its first interest rate hike. For now, let’s look at the drivers for each currency.

By all accounts, the ECB has probably run out of time and has no choice now but to go full throttle into quantitative easing as Europe struggles with deflation.  Bond yields for Germany, Italy, Spain, France, and even Portugal have dropped to levels not seen since the 14th century, according to Andrew Roberts, credit chief at RBS. ECB President Mario Draghi may have to go against Germany’s wishes and announce that the ECB will increase its balance sheet by buying sovereign bonds.  This along with Greek elections in January will pressure the Euro lower.

In Switzerland, the leadership at the Swiss central bank is totally focused on the ECB as evidenced by the Swiss decision in December to enter negative interest rates on deposits; this will go into effect on January 22nd, the same day as the ECB policy meeting. The Swiss are betting that the ECB will announce some sort of sovereign bond buying program on that date and they want to make sure that there 1.20 currency floor does not get violated. Currency speculators will endeavor to test the central bank’s resolve in protecting the 1.20 floor throughout the year ahead.

With the Bank of Japan fully committed to its QE program and Japan's Government Pension Investment Fund committed to doubling its allocation for both local and overseas stocks from bonds; the yen will continue to depreciate. Also, Prime Minister Abe’s election win in December gives him the latitude he needs to add more stimulus if the present programs do not yield the desired results of higher wages and growth.

In the UK, the second half of 2014 was plagued with falling inflation and the easing of growth causing market expectations of the UK being the first G7 country to raise interest rates to completely unwind. Perhaps the larger factor at play in 2015 will be political. Reduced growth and a fall in North Sea oil revenue will cause government revenues to fall leading to some fiscal consolidation. Add to this mix is the upstart popularity of the anti-EU party, UK Independent Party, led by the always colorful Nigel Farage and you get the strong possibility of a change in the make-up of the government. The Tories will have to team up with a different coalition party in order to stay in power, probably with the Labour party. This could spark a credit review and a possible warning or downgrade by rating agencies which in turn will weigh on the GBP.

A strong USD, falling commodity prices, and weak global growth leaves the dollar-bloc currencies vulnerable. Believe it or not, the CAD was the best performing petro-currency by a non-OPEC country in 2014. It was down only about 8% against the USD compared to 40% for Russia, 15% for Norway, and 13% for Mexico. The CAD’s resilience stems from commodity resources diversification, neutral monetary policy, and the benefit of having the U.S. as its biggest trading partner. The CAD will continue to depreciate in 2015 but it will probably find a bottom once the price of crude does.

The problem with Australia’s economy is that its number one customer for its biggest export, iron ore, is China. China will continue to slow down in 2015 as manufacturing gets rationalized. Add to this a very dovish central bank and you get an even weaker currency in the year ahead. The head of the central bank, Glenn Stevens, has been aggressively talking down the AUD in the past and has, on more than one occasion, mentioned that the currency should be at 75 cents against the USD.

The other dollar-bloc currency, the NZD, should also decline in 2015 has the central bank signals that it is ready for a pause in its interest rate raising cycle in response to very low inflation. In addition, the central bank’s discontent with the high level of the NZD should continue to encourage currency depreciation.

Finally, we come to China. China has experienced 42 consecutive months of negative producer price deflation and consumer inflation is at a 60 month low. In November, China’s leadership switched its strategy of cutting bank reserve ratios and decided to cut its benchmark interest rates for the first time

in two and a half years. We suspect that if growth in China falters then the leadership will opt to let its currency fall against the USD which will cause another wave of deflation to be exported to the rest of the world.

 

Threat of Grexit Looms Again

Two opposing stories dominated European financial headlines over the weekend as Greek political parties embarked on a flash campaign to determine the fate of the country’s membership in the euro currency zone. The first story is that German leadership publicly contends that they want the struggling nation to stay in the Eurozone and pay back its debts. The second story, however, is that the German’s believe that the Eurozone could cope with a Greek exit, or “Grexit”, if it proved necessary.

Greece’s current Prime Minister, Antonis Samaras, has warned that if the main opposition party, Syriza, wins the election, Greece would default and also exit the euro region. The leader of the Syriza Party, Alexis Tsipras, has openly stated that is his party would end the German-led, and IMF backed, austerity program. The stakes are high for every member of the Eurozone as polls suggest that Syriza will win on election-day, January 25th. A poll published this past weekend shows that Syriza leads with 30.4% compared to Samaras’ New Democracy party with 27.3%.

According to a report in Der Spiegel magazine on January 3rd, Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble are ready to accept a Grexit should Syriza win because they consider that the Eurozone has implemented enough reforms since the height of the regional crisis in 2012 to make a potential Grexit manageable and not disintegrate the currency union. In addition, they contend that the

European  Stability  Mechanism  (ESM),  the  EU’s  bailout  fund,  is  an  effective  and  available  rescue procedure to protect major financial institutions. Der Spiegel, quoting a senior German official, cited that, “The danger of contagion is limited because Portugal and Ireland are considered rehabilitated.” However,  one  can’t  help  but  be  wary  of  opening  Pandora’s  Box.  If one weak country leaves the Eurozone, then markets will pluck the next weakest one and so on. Borrowing costs for those economies will rise, which would make it nearly impossible for those governments to fund themselves and it becomes a self-fulfilling prophecy of sorts.

On  the  flip-side,  the  German  government  has  been  quoted that  they  want  Greece  to  stay  in  the Eurozone for the benefit of all its members, including Greece itself. From an article in  Ekathimerini found here,

The German government wants Greece to stay in the Eurozone and there are no contingency plans to the contrary, Vice Chancellor Sigmar Gabriel said on Sunday, responding to a media report that Berlin believes the currency union could cope without Greece.

“The goal of the German government, the European Union and even the government in Athens itself is to keep Greece in the Eurozone”, Gabriel said in the interview to appear today. “That’s why we can’t be blackmailed and why we expect the Greece government, no matter who leads it, to abide by the agreements made with the EU”, he said referring to the January 25th   Greek election and possible change of government.

As the euro zone’s paymaster, Germany is insisting that Greece must stick to a course of austerity and not backtrack on its bailout commitments – especially as it does not want to open the door for other struggling euro zone members to relax their reform efforts.

 

Peter   Bofinger,   one   the wisemen council of economic advisers to the German government, warned against Grexit, “There would be many high risks for the stability of the Eurozone with such a step”, he told Welt am Sonntag. He continued, “It would let a genie out of the bottle that would be hard to control.”

 

In public, Chancellor Merkel is being politically correct, but behind closed doors, it seems as though German leadership (and likely the Eurozone as a whole), simply wants the headache that is Greece to just go away. If Syriza does win the election, the EUR’s decline should pick up some pace.

VBCE FX Update for Wednesday, January 7th, 2015

USDCAD spot rate: 1.1850 - 1.1855 (AS AT 8:43AM PST)

RANGES:	Asia:	1.1823	to	1.1847
	Europe:	1.1822	to	1.1870
	North America:	1.1811	to	1.1865

Technical Support / Resistance:

S2	S1	R1	R2
1.1564	1.1671	1.1870	1.1984

Key Economic Data Releases:

-Canada international merchandise trade: -$0.64 billion (exp. -$0.30 billion)

-Canada Ivey purchasing managers index: 55.4 (exp. 52.3)

-U.S. ADP employment change: 241k (exp. 225k)

-U.S. trade balance: -$39.00 billion (exp. -$42.0 billion)

-U.S. FOMC meeting minutes: TBA ~ 11:00am

Key Event Calendar:

DATE	CANADA	U.S.A.
Jan.8	New housing price index	Initial jobless claims
Jan. 9	Housing starts, building permits, net	Non-farm payrolls, unemployment rate
	employment change, unemployment
	rate

Yesterday, USDCAD traded from 1.1753 up to 1.1840 after having fallen from 1.1845 down to 1.1730 the previous day. The USD is the best performing currency today on better than expected ADP employment and trade balance data. The market now awaits the 11:00am release of the U.S. Fed meeting minutes. There is some speculation that although interest rates will begin to rise in the U.S. (most likely in June) rates may not rise as much as what the market had previously expected. Overnight USDCAD dipped to 1.1822 before rising to 1.1870. The pairing has since fallen to 1.1811 followed by another attempt higher which has stalled at 1.1865. USDCAD has subsequently dipped to 1.1850. Currently, the TSX and the DJIA are up 0.29% and 0.82% respectively. EURCAD is down 0.50% trading between 1.3977 and 1.4093. GBPCAD is down 0.40% trading between 1.7840 and 1.7964. JPYCAD is down 0.60% trading between 0.00989 and 0.00999. Gold is down 0.37% trading between $1,209 and $1,219USD/oz, silver is down 0.25% trading between $16.30 and $16.63USD/oz, while oil is up 0.15%, trading between $46.86 and $49.29.

Sources: Reuters, Bloomberg, FXStreet, RBC Capital Markets, Bank of Canada, U.S. Federal Reserve, CNBC, Forexlive