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TORONTO — The Toronto stock market plunged over 200 points as emerging market worries persuaded investors to avoid riskier assets like equities and commodities.
The S&P/TSX composite index dropped 215.18 points to 13,717.79. The Canadian dollar was ahead 0.21 of a cent to 90.31 cents US.
The Dow Jones industrials fell 318.24 points to 15,879.11 after plunging 176 points on Thursday. The Nasdaq was 90.7 points lower to 4,128.17 while the S&P 500 index was down 38.17 points to 1,790.29.
Investors are worried about sharp drops in the values of currencies in several emerging markets, including Turkey, Russia, South Africa and Argentina.
These drops were sparked by moves by the U.S. Federal Reserve to cut back on its massive bond purchases, a key stimulus measure that kept long-term rates low.
But U.S. bond yields have risen as the Fed moves to taper its purchases, and investors have responded by taking their money out of emerging markets.
Canada’s inflation rate quickened somewhat to 1.2 per cent in December, higher than November’s level but still low by historical standards.
Statistics Canada said Friday the consumer price index was led higher by gasoline, which was 4.7 per cent more expensive at the end of 2013 than it was at the end of 2012.
The loonie reacted mildly positively to the news, trading up about a quarter of a cent to 90.34 cents US.
Six of the eight categories of items that Statistics Canada tracks the price of were higher.
Prices increased in every province except B.C., where they were flat.
Loonie inches higher
If pump prices are stripped out, inflation would have come in at 1.1 per cent.
That’s still within the band of between one and three per cent, where the Bank of Canada likes to see the rate stay, but it has been on the lower end of that range for a while.
In its latest interest rate decision, the central bank said it expects inflation to remain subdued for a while yet.
Canada’s inflation rate averaged 0.9 per cent last year. That’s down from 1.5 per cent in 2012 and the softest rate since during the recession in 2009.
“When we are already below [our inflation] target, as we are today, we care more about downside risks than upside ones,” Bank of Canada governor Stephen Poloz said earlier this week.
That’s the central bank’s way of saying it’s less concerned about prices rising to fast, and instead focused on ensuring the economy doesn’t slip any further into disinflation or even deflation.
There’s a lag time of a few months before the impact of Canada’s lower loonie is likely to show itself in inflation data. So economists are expecting the inflation number to come in on the low end of the central bank’s target range for the next several months.
“The inching up in year-on-year [inflation] should not give the [central bank] very much solace on inflation,” Scotiabank said in a commentary Friday morning.
“We don’t expect annual CPI to remain above 1 per cent for too long,” the bank said.
Just weeks after investment bank Goldman Sachs advised clients to bet against the loonie, global currency traders appear to be doing just that.
Bets against the loonie surged by more than a third in one week, the Globe and Mail reports. According to numbers from the U.S. Commodities Futures Trading Commission, there were $5.4 billion in short positions against the Canadian dollar last week, up by $1.5 billion in a week.
That’s the highest number of bets against the loonie since last spring, when short positions against the currency hit an all-time high.
There are numerous reasons analysts expect the loonie to keep falling, chief among them weakness in resource prices. Canada’s dollar generally tracks commodity prices.
In its report, Goldman Sachs noted that Canada has had a trade deficit — which normally means a declining currency — for the past five years. But the country avoided a sinking loonie because of the strength of its financial system, which attracted a lot of foreign investor money.
That foreign investment has now hit the brakes, Goldman Sachs said, and that’s reflected in a declining Canadian dollar.
A weaker dollar could be bad news for cross-border shoppers and people traveling abroad during the holiday season. Some travel companies are already considering slapping a “currency surcharge” on the price of package vacations. Many of these companies’ costs are in U.S. dollars.
But what’s bad news for travelers could be good news for retailers, who can expect to see more shopping at home if prices in the U.S. are higher for Canadians.
The loonie has been on a downward trajectory for much of the year, hitting its high point for 2013 in January, at above $1.01 U.S., before declining to around the 94-cent U.S. mark in recent weeks.
One of the world’s most influential investment banks says betting that the loonie is going to fall is one of its best investment tips for 2014.
After trading in a fairly narrow band between 95 cents and $1.05 US for the past three years, the bank says it expects the loonie to lose some of its value next year, because of a number of factors.
Canada has had a current account deficit — the balance of payments between Canada and the rest of the world for all goods, services, investments, imports and exports — for the last five years.
‘We see good reasons for gradual [loonie] weakness’– Goldman Sachs
Goldman says all else being equal, that should lead to any currency losing some of its value. But that hasn’t happened with the loonie due to a variety of other factors that the bank says are about to end.
A strong banking sector was able to attract foreign investment, enough to offset a 30 per cent decline in manufacturing since the recession. But our much lauded financial sector isn’t attracting as much foreign investment as it once did, Goldman notes.
Over the past few quarters, capital inflows have slowed rapidly, pushing the [balance of payments] into deficit of about one per cent of GDP currently,” Goldman says.
The loonie was also seeing some time in the sun as a reserve currency, which means other foreign governments were stockpiling it, and increasing its value. That trend is also slowing, Goldman says.
Another thing working against the loonie is that instead of a rate hike next year (which would push the loonie higher) economists are now saying it’s not impossible that we see a cut, as inflation remains low.
“Our baseline is for the [Bank of Canada] to be on hold, but since the money market curve is pricing a small chance of hikes through end-2014, we see risks here also skewed to the downside,” Goldman Sachs said.
The bank also says the housing market is likely to drag the loonie lower. “With house prices already very elevated … it is likely that private consumption will no longer be the kind of positive impulse to the economy that it was in the past,” the bank said.
“All told, there are a number of reasons why the Canadian dollar has scope to weaken,” the report reads. “Combining all these factors, we see good reasons for gradual [loonie] weakness to persist for idiosyncratic reasons [and] a steady drift weaker and gradual underperformance relative to other major currencies, in particular the U.S. dollar.”
Add it all up and the bank suggests the loonie could fall by as much as seven per cent. The loonie was trading hands at 94.38 cents US on Wednesday.
Canadian Dollar Overvalued By 10 Per Cent, World Economics Says. (FULL ARTICLE)
The Canadian dollar is suffering from overvaluation, according to a new measure of global currencies’ value.
The loonie is 10.1 per cent stronger than it should be when comparing the cost of a basket of goods here and in the U.S., according to analysts at World Economics who are testing out a new measure to compare prices worldwide.
What this means is that the loonie would have to be 10 per cent lower for goods to cost the same in Canada as they do in the U.S.
The estimate agrees almost perfectly with an analysis from BMO Capital Markets, released last week, that shows prices in Canada are about 10 per cent higher than they are in the U.S. However, that actually marked a narrowing of the gap, from around 14 per cent in May of 2012.
But Canada’s high-flying dollar is still not as overvalued as currencies in some other countries. The euro in France is overvalued by 28 per cent, when looking at the cost of goods in that country. At the other end of the spectrum is India, whose rupee is undervalued by about 45 per cent, the survey found….
- Loonie is overvalued, true value is under 88 cents US, index says (business.financialpost.com)
- Canadian dollar overvalued by 10%, new measure shows (theglobeandmail.com)
- Canadian Dollar Reaches 1-Week High on Plan to End U.S. Shutdown (bloomberg.com)
- Canadian Dollar Finishes Smooth Before September Tasks Information on Friday (torontocurrencyexchange.wordpress.com)