Well, not so long ago the Canadian Dollar was well below what all estimates put it at when it was hovering around the $0.65 mark.
Today, David Dodge is saying our dollar is “over inflated” against the US dollar in comparison with the rest of the world currencies. He sees the rise as a “currency blip” and was prepared to wait it out. With this weeks surge, in our dollar again, he’s a little more concerned and has voiced this publicly. He is also being joined by the ITF as they think the Euro is also climbing too rapidly against the US dollar.

I must say, I’ve never seen anything like this in the market before. Basically the G7 (G8 minus the US) saying things are good, but wait a minute, there not THAT good. Everyone understands that the global GDP is up compared to the US, but what’s happening in the currency market just isn’t inline.

Once again the focus goes back to China and the request to let their currency float on the currency market just like every other country. I’d say that’s throwing in a huge question mark in to the whole global equation, hoping that a huge shift in trading will somehow stabilize the market. Some one is going to have to explain this to me in simple terms. I see it akin to playing a game and someone coming along and doubling the surface area your playing on. Everyone will be forced to adjust, but do we really want global markets to be force into something? Yikes!
I must say these are indeed interesting times.

The following comes from an senior economist at CIBC. I find his writings simple and straightforward. An excellent summary of what’s currently happening in the world market.

Enjoy.

—
“When the US sneezes Canada catches pneumonia”. That’s a very catchy phrase, but it is also wrong. The US economy is experiencing the most severe housing market recession in generations, with negative implications for the economy as a whole. There is little doubt that the US economy will soften dramatically in the coming six months, the only question is if America will be able to avoid a full blown recession.
But on this side of the border, things look totally different. The labour market is on fire, the unemployment rate at a 30-year low, Canadian house prices continue to climb, and the loonie is reaching levels that only a short while ago were unimaginable.
At the heart of this reversal of fortune is the huge shift in the global terms of trade over the last decade. Simply put, economic value-added has shifted from information technology back to the natural resources. This is very evident in most commodity prices in general, and energy prices in particular. Today, it takes only a third as many barrels of oil to buy a basic computer as it did earlier in the decade.
And this development is largely behind the ability of Canada to continue to outperform despite a weakening American economy. It’s all about commodity prices, and both the Canadian economy and the Canadian stock market are highly sensitive to developments in the prices of natural resources. Admittedly, sometimes it’s a curse and sometimes it’s a blessing. Now it’s a blessing because the surge in commodity prices in general reflects a sustained and structural change in the economics of commodity markets worldwide. The booming
Chinese, Indian and other emerging markets mean continued strong demand for those commodities. What we are witnessing here is the rise of the middle class in those countries, with the “keeping up with the Joneses”
phenomenon increasingly adding to household spending and overall economic might — not unlike what North America has experienced in the 1950s and the 1960s.
In this environment, the US economy can no longer single-handedly impact global economic growth, and hence commodity prices. In the past three years, the US contributed only 12% to overall global economic growth, China contributed 30%. So it’s the developing world, not the US that drives the global economic bus.
This means that demand for commodity prices is likely to remain firm, boosting the Canadian economy despite a weakening American economy.
Another factor that distinguishes between Canada and the US is the real estate market. Housing starts south of the border are falling by 20% on year-over-year basis, the number of unsold homes is surging, and house prices have already fallen by 3%, and are likely to decline by additional 10% before it’s all said and done. This housing market bubble in the US was created by aggressive mortgage underwriting between 2004 and 2007 with subprime lending rising to a record high of no less than 22% of new mortgages. In Canada the situation
is very different; the share of exotic mortgages in the Canadian market is still negligible with subprime loans accounting for only 5% of new loans. In many ways, if the US pushed the envelope when it comes to mortgage risk, Canada has not touched the envelope yet. Accordingly, home valuations in Canada are much more consistent with economic and demographic fundamentals when compared to the US real estate market.
Accordingly, look for the Canadian economy and the Canadian stock market to outperform their US counterparts. Once the sleepy little resource backwater of the North American economy, Canada is turning the table on its big brother in a hurry.

Benjamin Tal
Senior Economist

Well, the big news this week was the Bank of Canada NOT raising the prime rate.

A few months ago, there was a run on the bond rate up to 4.6% about a month ahead of the Bank of Canada raising rates. At the time I wrote about the relationship between the increase in bond rate (i.e. market selling their bonds as a show of lack of confidence in the market) and the rise in the five year fixed rate (the benchmark for mortgages).

Last week I spoke about the ARM/VRM mortgage space tightening up as the cost to borrow funds in this area showed a steady increase and the spread just wasn’t there anymore to provide customers with the prime minus 90 variables.

Well, no sooner do the ARM/VRM cuts get announced, then to the fix rates start to rise. In the space of 1 week the bond rate rose from 4.1% to 4.4%. Again in anticipation of the Bank of Canada raising it’s rates.

Now comes the interesting part. The prime lending rate didn’t go up. Why? Well the Bank of Canada has several good reasons. The economy is growing quite quickly, however they don’t see it lasting much longer. They also think that the higher dollar will see it’s effects relatively soon to slow the economy.

So there you have it. Both fixed and variable rose in the last couple of weeks, seemingly putting pressure on to raise the central rate.

Personally, I thought this would be an interesting exercise given that the US just dropped their prime by a half point. I think all heck might have broken lose if our prime went up with the US dropping.  “Canada’s trying to slow it’s economy, while the US is trying to kick start the real estate market to fuel overall growth.”  One hitting the accelerator & the other hits the breaks. Oops!

Bank of Canada opted not to panic and hit the breaks. I think this is a wise thing.

Let’s hope the US real estate market starts up soon, which should in turn lower our dollar, thereby lowering our manufacturing costs (at least giving us a margin to work with), leveling off our economy and finally reduce our rates.

Or we can wait and see what happens next month!