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It was just last month when we profiled Canada’s “other problem”: record high household debt.

Canada is struggling to cope with falling crude prices which have put enormous amounts of pressure on some parts of the country, most notably Alberta, where suicide rates are on the rise, as is property crime and foodbank usage.

Amid the malaise, households are also being pressured by persistent CAD weakness – which is of course a symptom of falling crude. The currency’s decline has driven up prices for things like fresh fruits and vegetables, 75% of which Canada imports. That puts an extra burden on households that are already laboring under record debt.

As we showed three weeks ago, household debt relative to disposable income is sitting at 171% in Canada meaning that for every $100 in disposable income, households have debt obligations of $171. That’s the highest figure for any G7 country.

That’s disconcerting for any number of reasons. As we wrote, “this would be bad enough in a favorable economic environment with a benign outlook for rates, but it’s a veritable nightmare when the economy is sliding headlong into recession and central planners are hell bent on trying to normalize policy some time in the next five or so years.”

In other words, the outlook for Canada’s economy isn’t good, and that means joblessness is likely to rise going forward…

But interest rates have virtually nowhere to go but up – at least in the medium to long-term. Sure Stephen Poloz may cut rates one or two more times to try and help the oil patch avert certain insolvency, but at 50 bps, there’s only so much lower Canada can go unless the BoC intends to experiment with NIRP.

…click on the above link to read the rest of the article…

Negative Interest Rates Already In Fed’s Official Scenario

February 2, 2016

Negative Interest Rates Already In Fed’s Official Scenario

Over the past year, and certainly in the aftermath of the BOJ’s both perplexing and stunning announcement (as it revealed the central banks’ level of sheer desperation), we have warned (most recently “Negative Rates In The U.S. Are Next: Here’s Why In One Chart”) that next in line for negative rates is the Fed itself, whether Janet Yellen wants it or not. Today, courtesy of Wolf Richter, we find that this is precisely what is already in the small print of the Fed’s future stress test scenarios, and specifically the “severely adverse scenario” where we read that:

The severely adverse scenario is characterized by a severe global recession, accompanied by a period of heightened corporate financial stress and negative yields for short-term U.S. Treasury securities.

As a result of the severe decline in real activity and subdued inflation, short-term Treasury rates fall to negative ½ percent by mid-2016 and remain at that level through the end of the scenario.
And so the strawman has been laid. The only missing is the admission of the several global recession, although with global GDP plunging over 5% in USD terms, we wonder just what else those who make the official determination are waiting for.

Finally, we disagree with the Fed that QE4 is not on the table: it most certainly will be once stock markets plunge by 50% as the “severely adverse scenario” envisions, and once NIRP fails to boost economic activity, as it has failed previously everywhere else it has been tried, the Fed will promtply proceed with what has worked before, if only to make the true situation that much worse.

Until then, we sit back and wait.

Here is Wolf Richter with Negative Interest Rates Already in Fed’s Official Scenario

…click on the above link to read the rest of the article…

More Central Bank Trouble in Canada

January 22, 2016

More Central Bank Trouble in Canada

Yesterday, the Governor of the Bank of Canada Stephen Poloz surprised many by not lowering the target for the overnight rate to 0.25% from 0.50%. The central bank cut this rate twice last year in an attempt to stimulate the economy. During the past nine months the TSX index has fallen from more than 15,500 to below 11,800, the Canadian dollar has depreciated from US$0.84 to below US$0.69 and crude oil prices have fallen from US$60/bbl to less than US$28/bbl. Consumer prices for imported products are rising quickly and government tax revenues are falling. In other words, the circumstances that usually motivate the Bank of Canada to act did not trigger a response from authorities this time.

The decision on the overnight rate may make the Bank of Canada an exception among other central banks that have reduced their key lending rates to zero or less. Bucking the trend does not mean that Canadians are going to escape the consequences of seven years of an overnight rate of 1.0% or less.

It is widely expected the Federal budget is going to contain borrowing $15 billion in the next fiscal year, ostensibly to “stimulate the economy”. Borrowing by the provincial government in Alberta could easily be more than half the Federal level of borrowing. Incredibly, the provincial government in Quebec may be the most parsimonious of all provincial governments.

Governments have no wealth of their own that is not first taken from someone else. There are only three sources available: current taxpayers, future taxpayers and in the case of the federal government, creating inflation by selling government bonds to the Bank of Canada. Stimulus spending likely means that future taxpayers will be confiscated to a greater extent than they would be otherwise. Inflation will erode further the purchasing power of every Canadian dollar in existence. Initial recipients of stimulus transfers will benefit; most Canadians will not.

…click on the above link to read the rest of the article…

Canada Set To Unleash Negative Rates As Oil Patch Dies, Depression Deepens

January 19, 2016

Canada Set To Unleash Negative Rates As Oil Patch Dies, Depression Deepens

This Wednesday, the Bank of Canada has a decision to make.

Canada’s oil “dream” is dying thanks to the inexorable slide in crude prices and as the IEA made clear earlier today, the pain is set to persist for the foreseeable future as the world “drowns in oversupply.”

“Lower for longer” has hit the country’s oil patch hard. We’ve spent quite a bit of time documenting the plight of Alberta, where job cuts tied to crude’s slide have led directly to rising suicide rates, soaring property crime, and increased food bank usage (not to mention booming business for repo men).

Adding insult to injury for Canadians is the plunging loonie. Because the country imports most of its fresh fruits and vegetables, the weak currency has triggered a sharp increase in the price of many items in the grocery aisle as documented in a hilarious series of tweets by incredulous Canadian shoppers.

The question for the Bank of Canada is this: is the risk of an even weaker loonie worth taking if a rate cut has the potential to head off the myriad risks facing the economy?

We’ll find out what the BOC thinks tomorrow, but in the meantime, analysts have weighed in. JP Morgan’s Daniel Hui says CAD needs to fall further lest producers should simply close up shop. “[W]ith West Canada Select (WCS) now sitting just a dollar above the average per-barrel operational cost of $20 (Canadian), the risk is that any further decline will cause a whole new host of spillovers including potential shutdown and retrenchment of energy extraction and exports (with its attendant growth and balance of payment effects) or the potential of highly leveraged companies running operational losses, and the more contagious financial impact that might have in Canada, with broader spillovers.”

…click on the above link to read the rest of the article…

Canada Rebels against the Destruction of the Loonie

January 19, 2016

Canada Rebels against the Destruction of the Loonie

The fear of “currency instability.”

“Without precedent” — that’s what National Bank of Canada’s chief economist Stéfane Marion called the wholesale destruction of the loonie.

The Canadian dollar is in a tailspin. Rarely has it tumbled so far so fast, and against so many currencies. The steepness of the CAD’s depreciation against the USD is without precedent, -33%, or 3.5 standard deviations, in 24 months.

In the two weeks so far this year, the loonie has dropped 5.8% against the euro, 5.3% against the greenback, and 8.6% against the yen. “Even the likes of Norway (+5.4% against the CAD) and Sweden (+3.9%) are mocking the once-mighty Canadian dollar,” Marion wrote in the note. “Australia and New Zealand? Not to worry, they are also gaining ground against the CAD.”

The Canadian dollar plunged to a fresh 13-year low last week and hasn’t recovered since, hovering at US$0.688, below $0.70 for the first time since spring 2003.

People are getting alarmed. A lot of consumer goods are imported, including 81% of fruits and vegetables. The plunging loonie makes them more expensive for Canadians: meat prices rose 5% last year, fruits 9%, vegetables 10%. The average household ended up spending C$325 more for food in 2015 than in 2014, according to the Food Price Report. And it’s likely to get worse.

When Stephen Poloz became governor of the Bank of Canada in 2013, he set out to hammer down the Canadian dollar. In 2015, he redoubled his efforts. He relied on ceaseless jawboning. He even invoked the absurdity of negative interest rates. And he cut the overnight rate twice, the infamous surprise cut in January and the telegraphed cut in July, at a time when the Fed was flip-flopping about raising rates.

…click on the above link to read the rest of the article…

Canadians Are Panicking Over Food Costs After Currency Collapse

January 15, 2016

Canadians Are Panicking Over Food Costs After Currency Collapse

It’s no secret that America has a serious inflation problem. Though the Federal Reserve insists that our inflation rate is only at around .5%, we’ve all seen the price of food, rent, healthcare, and energy skyrocket over the past 10-20 years. However, this has been a gradual shift. Canada on the other hand, has just seen the price of every day goods rise precipitously over a very short period of time.

The crash in oil prices has crippled their economic growth, and led to the decline of the Canadian dollar, as well as a predictable increase in the cost of imports like food. For those of us living in the US, this provides a really good example of what life may be like should the dollar take a plunge in the near future. Here’s what our northern neighbors have been dealing with:

It is often said that a free-floating currency acts as a shock absorber.

But when Canadians go shopping for groceries these days, they’re getting nothing but the shock—sticker shock, that is.

On Tuesday, the Canadian dollar, commonly known as the loonie, broke below 70 U.S. cents for the first time since May 1, 2003.

For America’s northern neighbor, which imports about 80 percent of the fresh fruits and vegetables its citizens consume, this entails a sharp rise in prices for these goods. With lower-income households tending to spend a larger portion of income on food, this side effect of a soft currency brings them the most acute stress.

James Price, director of Capital Markets Products at Richardson GMP, recently joked during an interview on BloombergTV Canada that “we’re going to be paying a buck a banana pretty soon.”

Canadians took to twitter this week to share their collective horror over the rising cost of food. Cucumbers are $3 each. A head of cauliflower is $8.

…click on the above link to read the rest of the article…

Alberta Freezes Government Salaries As Canada’s Oil Patch Enters Second Year Of Recession

January 14, 2016

Alberta Freezes Government Salaries As Canada’s Oil Patch Enters Second Year Of Recession

On Wednesday, we documented the astonishing prices beleaguered Canadians are now forced to pay for groceries thanks to the plunging loonie.

Oil’s inexorable decline has the Canadian dollar in a veritable tailspin and because Canada imports the vast majority of its fresh food, prices on everything from cucumbers to cauliflower are on the rise, tightening the screws an already weary shoppers.

Soaring food prices are but the latest slap in the face for Canadians and especially for Albertans who have been hit the hardest by 13 months of crude carnage. Resources account for a third of provincial revenue and with oil and gas investment expected to have fallen over 30% in 2015, Alberta’s economy has is expected to contract for the foreseeable future.

The economic malaise has had a number of nasty side effects including soaring property crime in Calgary, rising food bank usage, and sharply higher suicide rates.

With the outlook for oil prices not expected to improve in the near-term, ATB now says the province faces two long years of recession. “The pain is going to be concentrated in the first half of the year. But we don’t really see any ending in sight to a downturn at least until the end of the year. So we are calling for another contraction,” ATB’s Chief Economist Todd Hirsch says in The Alberta Economic Outlook Q1 2016 report.

“This low price environment continues to discourage new investment and spending and has weighed down employment — not only in the oilpatch, but throughout most sectors of the province,” Hirsch continues. “This downturn is longer in duration certainly than 2009 was which was a very quick downturn but very short-lived. This one is going to linger on longer.“

Indeed. Here are some charts from the report which underscore the magnitude of the sharp reversal in fortunes.

…click on the above link to read the rest of the article…

Canadian dollar dips below 71 cents for 1st time since 2003

January 6, 2016

Canadian dollar dips below 71 cents for 1st time since 2003

Oil and threat of global conflicts weigh on risky loonie

The Canadian dollar is dropping to levels not seen since the summer of 2003.

The Canadian dollar is dropping to levels not seen since the summer of 2003. (Pawel Dwulit/Bloomberg)

The Canadian dollar lost more than half a cent this morning, pushed down by oil prices and widespread risk aversion, going to below 71 cents US.

Early Wednesday, the loonie was changing hands at 70.90 cents US, down 0.55 of a cent. That’s the lowest level on record for Canada’s currency since the summer of 2003, when the dollar was on a multiyear march upwards from below 62 cents, which it briefly hit in 2002.

The reasons for the loonie’s weakness are a mix of old and new, as oil prices sank back to $35 US per barrel, but also “added pressure from the broader market tone of risk aversion,” Scotiabank foreign exchange strategist Shaun Osborne said in a note to clients.

Broadly speaking, the Canadian dollar is perceived to be a riskier asset than other currencies, such as the U.S. dollar and the euro. Anything with risk attached to it is getting savaged in the current market, as investors consider the possibility of conflict between Saudi Arabia and Iran, coupled with Tuesday’s news that North Korea may have detonated a hydrogen bomb.

On Tuesday, Bank of Montreal chief economist Douglas Porter told a gathering of leading economists that the loonie could fall below 70 cents US before it begins to recover.

WTI Plunges To $35 Handle As Loonie Hits 12 Year Low

January 5, 2016

WTI Plunges To $35 Handle As Loonie Hits 12 Year Low

WTI Crude prices just broke back to a $35 handle for the first time since mid-December as the combination of un-growth, Saudi price cuts, a rancorous OPEC, and production increases weigh on the world’s most important commodity. At the same time, oil producers are getting hit with the Canadian Dollar plunging above 1.4000 to its lowest since 2003…

And FX producers are getting battered…

This Is What Gold Does In A Currency Crisis, Canadian Edition

December 27, 2015

This Is What Gold Does In A Currency Crisis, Canadian Edition

Gold, meanwhile, has been sucked down with the rest of the commodities complex, falling hard since 2013. But only in US dollars. For Canadians, with their weak domestic currency, gold has been behaving just fine. It’s up 17% in C$ terms over the past two years and looks ready to rally from here:

Protection from currency trouble is why people own it, and why in the vast majority of places it’s owners are very happy.

Now combine a falling currency with a crashing oil price and the result is a surprisingly favorable environment for Canadian and other weak-currency-country gold miners. Big mostly-Canadian miner Goldcorp, for instance, has seen its production costs fall by almost 20% in USD terms in the past two years, with more to come based on the subsequent cheapening of the diesel fuel required to run its equipment.

If 2016 plays out according to the script that has rising US interest rates producing an even stronger dollar (and correspondingly weaker currencies elsewhere) the terms of trade for non-US gold miners should become even more favorable. Many of them will report positive earnings comparisons while most other industries are doing the opposite, putting them on the radar screens of momentum traders and value investors who haven’t been paying attention since the last gold/USD bull market ended.

Halifax Superstores warn of short supply due to weather, dollar

December 20, 2015

Halifax Superstores warn of short supply due to weather, dollar

Grocery bills likely will go up in 2016 due to vegetable and fruit prices, a report says

Inflation is modest at 1 per cent, but the price of fresh vegetables was up 11.5 per cent in September, Statistics Canada said.

Inflation is modest at 1 per cent, but the price of fresh vegetables was up 11.5 per cent in September, Statistics Canada said. (Jacques Boissinot/Canadian)

A sign posted in the produce section of a Halifax area Superstore apologized to customers for the inconvenience.

”Due to weather related issues in the growing regions coupled with the impact of U.S. exchange,” the sign reads, “we are unfortunately experiencing significantly higher than normal costs and gaps in supply.”

These signs have been posted in Superstores in the Halifax area. (Nancy Waugh/CBC)

No one from Loblaw, the chain which owns Atlantic Superstore, was available to comment Saturday.

Dominion grocery stores, also owned by Loblaw, posted similar signs in Newfoundland this week.

The price of groceries in Canada has risen by 4.1 per cent in the last year — faster than inflation, according to a recent food price forecast by the University of Guelph.

7 foods that will cost you more in 2016 and why

Canada imports 81 per cent of its produce, much of that from the U.S., which has had variable weather and drought in the last year. That problem has been compounded by a sudden, severe drop of the Canadian dollar last winter, largely due to oil, the report said.

Consumers saw the price of fruit jump by 9.1 per cent and vegetables even more by 10.1, the report found.

Food prices ‘steadily marching up’

Annette d’Eon picked up a few groceries at Quinpool Road’s Superstore Saturday afternoon. Food prices she’s seen have been “steadily marching up,” she said.

…click on the above link to read the rest of the article…

Canadian dollar on track for 2nd-worst year ever

December 19, 2015

Canadian dollar on track for 2nd-worst year ever

Currency is down 17% year-to-date against the U.S. currency

The Canadian dollar hasn't been at par with the U.S. dollar for three years. This year, the loonie's slide against the American dollar was one of the biggest ever.

The Canadian dollar hasn’t been at par with the U.S. dollar for three years. This year, the loonie’s slide against the American dollar was one of the biggest ever. (Mark Blinch/Reuters)

Assuming that the loonie stays at current levels (and that may be a reckless assumption given the steady slide we’ve seen of late) our dollar is on track to record its second-worst year ever, according to calculations from BMO Capital Markets, with a drop of 17 per cent since the start of the year.

That would be second only to 2008’s drop of 18.6 per cent, when the financial crisis was gripping much of the industrialized world.

Economists at the National Bank of Canada put it this way in a currency outlook this month: “This year is one to forget for holders of the Canadian dollar.”

To put this slide into perspective, of course, it’s necessary to go back more than one year. Remember when the dollar was on par with its American counterpart? It wasn’t that long ago. The two currencies were at par as recently as December 2012.

Today, it costs at least $1.40 to buy a greenback that could be swapped one-for-one with our loonie three years ago.

Experts cite several main reasons for the slide since then:

Slumping oil prices. With oil plunging to around $35 US a barrel (it was around $60 US at the start of the year and more than $100 US in the middle of last year), the hit to our currency has been huge. Canada is a large exporter of oil, which is priced in U.S. dollars. Prices of gold, copper and coal, which Canada also exports in abundance, are also slumping.

…click on the above link to read the rest of the article…

Canadian dollar tumbles to close below 72 cents US

December 18, 2015

Canadian dollar tumbles to close below 72 cents US

Oil slips below $35 US amid continuing strength of U.S. dollar

Some analysts say the loonie could eventually fall to 70 cents US as the currency is pressured by low commodity prices, and the diverging interest rate policies of Canada and the United States.

Some analysts say the loonie could eventually fall to 70 cents US as the currency is pressured by low commodity prices, and the diverging interest rate policies of Canada and the United States. (Mark Blinch/Reuters)

UPDATED

Loonie has lost 17% of its value in 2015, the second-worst year it’s ever had

The Canadian dollar continued its slide today, closing below the 72-cent US mark for the first time since the spring of 2004.

The loonie ended the trading day at 71.68 cents US, down more than four-fifths of a cent from its close Wednesday. At one point during the day, it was down more than a full cent.

Put another way, it now costs almost $1.40 Cdn at official exchange rates to buy a single U.S. dollar. Tack on service fees charged by banks and anyone buying American currency at their local financial institution will end up paying $1.43 or so.

The loonie is on track to post its second-worst year ever, down 17 per cent since Jan. 1, and there’s still a week to go, Bank of Montreal economist Doug Porter noted Thursday. “The only bigger annual decline was in the extreme conditions of 2008, when the Canadian dollar fell 18.6 per cent — a threshold I thought would never even be approached again,” Porter said.

Several factors

The dollar’s drop has been fuelled by several factors, including the continuing slide in oil prices, and the diverging monetary policies of Canada and the United States.

The U.S. Federal Reserve on Wednesday began raising its key lending rate for the first time in nearly 10 years, while the Bank of Canada has indicated it’s in no hurry to follow suit. Some analysts say the Bank of Canada may have to lower rates to jump start the economy.

…click on the above link to read the rest of the article…

The Next Domino: CANADA

December 13, 2015

The Next Domino: CANADA

The Federal Reserve has kept its zero interest rate policy (‘ZIRP’) for several years (and much longer than originally anticipated) whilst the European Central Bank seems to be getting serious about doing ‘better’ and has now reduced the deposit rate at the ECB to -0.30%. It’s already remarkable a central bank doesn’t seem to have any problem to reduce interest rates into the negative territory, but now Canada is considering making the same step as well.

Source: tradingeconomics.com

Even though Canada’s benchmark interest rate is still relatively ‘high’ at 0.5%, the governor of the Central Bank of Canada has now hinted at a negative interest rate as well. That’s interesting, but not really surprising when you look at the current situation of the mining sector and the oil and gas sector, which have been important backbones of the Canadian economy for quite a while.

The gold and copper price aren’t really giving mining companies a lot of hope and not only have the corporate tax payments from the sector been reduced, several mines have announced layoffs, reducing the employment rate in Canada. That’s tough luck, but the oil and gas sector might be in an even worse shape, and especially the province of Alberta will be in for a lot of pain in 2016 (and we would honestly be extremely surprised if the GDP in Alberta would increase ). Unfortunately this will create a ripple-effect throughout the entire Canadian economy and the Toronto Stock Exchange has lost 17.5% since April of this year which is more than three times as much as the loss of the Dow Jones Index in the same time frame.

Source: stockcharts.com

Just have a look at the oil and gas price, and it shouldn’t surprise you the majority of the oil and gas producers is ‘underwater’ and won’t generate a profit this year.

…click on the above link to read the rest of the article…

Bank of Canada Crushes Loonie, Creates Mother of All Shorts

December 12, 2015

Bank of Canada Crushes Loonie, Creates Mother of All Shorts

Clear winners: rich Chinese who buy homes in Canada.

The Canadian dollar swooned 1% against the US dollar on Friday, to US$0.7270, after having gotten hammered for the past six of seven trading days. It’s down 5% in November so far, 15.5% year-to-date, and 31% from its post-Financial Crisis peak of $1.06 in April 2011. It hit the lowest level since June 2004.

The commodities rout would have been bad enough. Given the importance of commodities to the Canadian economy, the multi-year decline in the prices of metals, minerals, and natural gas, and then starting in mid-2014, the devastating plunge of the price of oil, would have been sufficient in driving down the loonie.

That the Fed has tapered QE out of existence last year and has been waffling and flip-flopping about rate hikes ever since made the until then beaten-down US dollar, at the time the most despised currency in the universe, less despicable – at the expense of the loonie.

Those factors would have been enough to knock down the loonie. But it wasn’t enough, not for the ambitious Bank of Canada Governor Stephen Poloz. The man’s got a plan.

He is in an all-out currency war. He’s out to crush the loonie beyond what other forces are already accomplishing. He’s out to pulverize it, and no one knows how far he’ll go, or where he’ll stop, or if he’ll ever stop. He has singlehandedly created the short of a lifetime.

It should spook every Canadian with income and assets denominated in Canadian dollars and those wanting to buy a home in Canada (we’ll get to that bitter irony in a moment).

Poloz has been in office since June 2013, and this is what he has accomplished so far:

…click on the above link to read the rest of the article…

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