Major News This Week : September 09, 2013

Several news items captured our attention last week. On Wednesday the Bank of Canada surprised no one when it announced that its key interest rate would stay at 1%. In the press release, the Bank said that "as long as there is significant slack in the Canadian economy, the inflation outlook remains muted, and imbalances in the household sector continue to evolve constructively, the considerable monetary policy stimulus currently in place will remain appropriate." Canada and the U.S. released radically different employment figures on Friday. The Canadian economy created 59,200 jobs in August, or 39,200 more than expected. The U.S. economy created 169,000 jobs in August, or 11,000 less than expected, but it was also announced that July’s figure had been revised downward by 58,000 jobs. This news allowed the loonie to rise by close to 1% on Friday. Have a good week!

The Loonie

“Action is the foundational key to all success.” - Pablo Picasso

In its latest announcement, the Bank of Canada’s last press release mentioned greater financial volatility in the economies of several emerging countries, and this adds some uncertainty to Canada’s growth outlook. Not too long ago, we were counting on their strength to lift our struggling global economy. What happened? In order to revive their anemic economies, the developed countries implemented unconventional monetary policies, and the resulting massive injection of liquidity created an unprecedented flow of capital to the emerging countries. A favourable credit environment in the developed countries encouraged investors to take advantage of the lower interest rates and make investments in emerging areas. The result was a sharp appreciation of several exotic currencies, including Brazil’s real and India’s rupee. Developing countries were able to finance large current account deficits while generating good growth that pushed deep structural problems out of the limelight. Last May, the financial community was shaken when the leaders of the U.S. Federal Reserve expressed a willingness to change the Fed’s monetary policy in the very short term.

The FOMC's next meeting—on September 17 and 18—will probably be followed by a statement that its bond purchases will be cut by $20 billion or from $85 billion to $65 billion, per month. The anticipated tightening of liquidity has immediately stoked fears for the future growth of emerging countries. They now find themselves on the flip side of the coin, and reality is hitting them hard. Fear has gripped foreign investors, who have been taking back their marbles, leaving India, Brazil and Turkey in very precarious situations, although China and Russia have fared somewhat better. The following graph shows how three currencies have fallen against the U.S. dollar since early May. This weakness reflects a recent exodus of foreign capital. According to Morgan Stanley, some $760 million worth of assets were liquidated in just one week.

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