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The competitive currency devaluation race begins in ernest now...
Canada Unexpectedly Cuts Rate as Dollar, Credit Slow Inflation
By Greg Quinn
Dec. 4 (Bloomberg) -- The Bank of Canada unexpectedly cut its main interest rate for the first time since April 2004, saying the higher Canadian dollar and financial market ``volatility'' restrained inflation more quickly than expected.
The target rate for overnight loans between commercial banks was lowered a quarter point to 4.25 percent, reversing an increase made in July. Only 12 of 27 economists surveyed by Bloomberg News predicted today's reduction, with the rest calling for no change.
``The Bank now expects inflation over the next several months to be lower than was projected,'' the central bank said today in a statement from Ottawa, referring to an Oct. 18 economic forecast. ``In light of this shift, the Bank has decided to lower the target for the overnight rate.''
The currency's rise to record highs this year slowed the exports that make up 30 percent of the country's economic output and pushed the central bank's preferred inflation measure below a 2 percent target. Today's move heeds calls by companies ranging from Montreal jet maker Bombardier Inc. to Vancouver lumber producer Canfor Corp., as well as provincial premiers, who said the dollar's rise was crushing manufacturers.
The central bank said today that ``difficulties'' caused by the collapse of the U.S. subprime mortgage market will take longer than expected to fix. Also, policy makers said weaker U.S. demand will hurt exporters, while ``competitive pressures'' related to the currency's ``spike'' last month are curbing inflation.
``We see no reason for them to wait,'' for more evidence of an economic slowdown to cut rates, Jacqui Douglas, an economist with TD Securities in Toronto, wrote in a note to clients before the announcement. Douglas predicted policy makers would cut rates again next month.
Canadian Dollar
The currency reached an all-time high of 90.58 Canadian cents per U.S. dollar on Nov. 7, before falling to a nine-week low of C$1 yesterday.
The country's trade surplus narrowed to a nine-year low of C$2.7 billion in September, according to Statistics Canada, the same month the currency reached parity with the U.S. dollar for the first time since 1976.
Growth in the consumer price index, minus eight volatile items such as gasoline, has declined from 2.5 percent in June to 1.8 percent in October, the slowest since June 2006. Policy makers use the so-called core inflation rate to gauge future trends.
There are still signs that inflation may quicken. The unemployment rate fell to a 33-year low of 5.8 percent in October and average hourly wages rose 4.1 percent from a year earlier, the third straight month they gained more than 4 percent.
The central bank repeated today the economy is operating beyond full capacity. In recent months it has said the economy is strained by strong domestic demand and high prices for the country's energy and metals.
Today is Governor David Dodge's second-last decision before he retires Jan. 31 and is replaced by Mark Carney, a former Goldman Sachs Group Inc. investment banker. Carney, 42, is scheduled to appear at the House of Commons Finance Committee tomorrow to discuss his views on the currency's advance and other issues, the first-ever appointment hearing for a governor- designate.
The competitive currency devaluation race begins in ernest now...
Canada Unexpectedly Cuts Rate as Dollar, Credit Slow Inflation
By Greg Quinn
Dec. 4 (Bloomberg) -- The Bank of Canada unexpectedly cut its main interest rate for the first time since April 2004, saying the higher Canadian dollar and financial market ``volatility'' restrained inflation more quickly than expected.
The target rate for overnight loans between commercial banks was lowered a quarter point to 4.25 percent, reversing an increase made in July. Only 12 of 27 economists surveyed by Bloomberg News predicted today's reduction, with the rest calling for no change.
``The Bank now expects inflation over the next several months to be lower than was projected,'' the central bank said today in a statement from Ottawa, referring to an Oct. 18 economic forecast. ``In light of this shift, the Bank has decided to lower the target for the overnight rate.''
The currency's rise to record highs this year slowed the exports that make up 30 percent of the country's economic output and pushed the central bank's preferred inflation measure below a 2 percent target. Today's move heeds calls by companies ranging from Montreal jet maker Bombardier Inc. to Vancouver lumber producer Canfor Corp., as well as provincial premiers, who said the dollar's rise was crushing manufacturers.
The central bank said today that ``difficulties'' caused by the collapse of the U.S. subprime mortgage market will take longer than expected to fix. Also, policy makers said weaker U.S. demand will hurt exporters, while ``competitive pressures'' related to the currency's ``spike'' last month are curbing inflation.
``We see no reason for them to wait,'' for more evidence of an economic slowdown to cut rates, Jacqui Douglas, an economist with TD Securities in Toronto, wrote in a note to clients before the announcement. Douglas predicted policy makers would cut rates again next month.
Canadian Dollar
The currency reached an all-time high of 90.58 Canadian cents per U.S. dollar on Nov. 7, before falling to a nine-week low of C$1 yesterday.
The country's trade surplus narrowed to a nine-year low of C$2.7 billion in September, according to Statistics Canada, the same month the currency reached parity with the U.S. dollar for the first time since 1976.
Growth in the consumer price index, minus eight volatile items such as gasoline, has declined from 2.5 percent in June to 1.8 percent in October, the slowest since June 2006. Policy makers use the so-called core inflation rate to gauge future trends.
There are still signs that inflation may quicken. The unemployment rate fell to a 33-year low of 5.8 percent in October and average hourly wages rose 4.1 percent from a year earlier, the third straight month they gained more than 4 percent.
The central bank repeated today the economy is operating beyond full capacity. In recent months it has said the economy is strained by strong domestic demand and high prices for the country's energy and metals.
Today is Governor David Dodge's second-last decision before he retires Jan. 31 and is replaced by Mark Carney, a former Goldman Sachs Group Inc. investment banker. Carney, 42, is scheduled to appear at the House of Commons Finance Committee tomorrow to discuss his views on the currency's advance and other issues, the first-ever appointment hearing for a governor- designate.
Remember the iTulip mantra: Debt deflation will not be permitted to develop into a self re-enforcing process that drives up the value of the U.S. dollar. Every central bank on earth understands the risks. Short term rates will be held below CPI. Anti-deflation will be achieved at least partially via global currency depreciation. This Canadian rate cut may be looked back on years hence as the starting gun for the process. Gold liked the rumor and the news.
The competitive currency devaluation race begins in ernest now...
this is a prelim. the real deal will be when the ecb blinks.
this is a prelim. the real deal will be when the ecb blinks.
Information is always in the divergences.
This rate cut was "not expected". The ECB's first rate cut, when it comes, will probably not be a surprise.
Debt deflation will not be permitted to develop into a self re-enforcing process that drives up the value of the U.S. dollar.
You lost me here.
Information is always in the divergences.
This rate cut was "not expected". The ECB's first rate cut, when it comes, will probably not be a surprise.
chris coles linked to an article in the london times by anatole kaletsky [the "kal" in gavekal]. in it, he writes:
Although today’s media headlines and market chatter are dominated by stories about the “collapsing” of the dollar, the real currency story of the past few years has not been the devaluation of the dollar, but the revaluation of the euro and the pound. The fact is that the dollar has scarcely been devalued at all against the important Asian currencies – it is worth exactly the same against the yen as it was three years ago. Meanwhile, the euro and the pound are now 20 per cent more expensive, not only against the dollar, but also against the yuan and the yen.
i suppose he should have mentioned the loonie, too, but he didn't. anyway, the bulk of the adjustment has been in the euro and pound - note how in another thread you calculated that gasoline hadn't risen in british pounds. anyway, SOME currencies have maintained purchasing power. when the ecb goes it means the germans have finally gotten over weimar, or at least found current exigencies more pressing than historical fears. at that point, too, ALL currencies will be dropping rapidly against real goods, and gasoline will rise even when paid for in pounds [or euros].
this is not to say that a loonie rate cut/devaluation is unimportant. i was going to say it was the opening gun, but i suppose the benignly neglected devaluation of the dollar is itself the opening gun of beggar they neighbor. take a look at the kaletsky article at http://www.timesonline.co.uk/tol/comment/columnists/anatole_kaletsky/article2988241.ece?EMC-Bltn=LOF6I4
in it he says that u.s. exports should improve markedly, mostly at the expense of the europeans.
the biggest trade effects of the dollar’s decline against the euro are likely to be seen not in the American or European markets, but in third countries where European manufacturers compete against American, Japanese and other Asian rivals on roughly even terms. These are the markets in which European exporters will be squeezed out most readily by price competition from their Asian and American rivals. In sum, it may seem natural to think of companies such as Toyota, Sony or Samsung as being most vulnerable to the present US mortgage crisis, but the real casualties of a US slowdown will probably be the likes of Volkswagen, Philips and Nokia.
...anyway, the bulk of the adjustment has been in the euro and pound...
...and the Aussie, and the Kiwi, and the Norwegian Krone, and so forth.
The pegged currencies and the two "zero-interest" free-money carry trade funding currencies are now the increasingly visible exceptions, as we know.
...when the ecb goes it means the germans have finally gotten over weimar, or at least found current exigencies more pressing than historical fears. at that point, too, ALL currencies will be dropping rapidly against real goods, and gasoline will rise even when paid for in pounds [or euros]...
I suspect it will be the latter. Although UKs Northern Rock is getting most of the attention, it sure appears the German banks are the most vulnerable in Europe. The German government has not hesitated to bail them out without question, but that would not appear a sustainable situation. And that may be the reason the Bundesbank finally caves in - to allow a steepening of the yield curve so the banks can generate risk-free profits to repair their balance sheets instead of continuous recourse to the taxpayers pocketbooks.
...this is not to say that a loonie rate cut/devaluation is unimportant. i was going to say it was the opening gun, but i suppose the benignly neglected devaluation of the dollar is itself the opening gun of beggar they neighbor. take a look at the kaletsky article at http://www.timesonline.co.uk/tol/comment/columnists/anatole_kaletsky/article2988241.ece?EMC-Bltn=LOF6I4
in it he says that u.s. exports should improve markedly, mostly at the expense of the europeans.
Stats indicate US exports already responding; Canada's problem is primarily exports TO the USA. It's products are being replaced with US sourced alternatives.
Gonna be an interesting few years ahead...
Andreuccio
12-04-07, 12:53 PM
Originally Posted by kaletsky
the biggest trade effects of the dollar’s decline against the euro are likely to be seen not in the American or European markets, but in third countries where European manufacturers compete against American, Japanese and other Asian rivals on roughly even terms. These are the markets in which European exporters will be squeezed out most readily by price competition from their Asian and American rivals. In sum, it may seem natural to think of companies such as Toyota, Sony or Samsung as being most vulnerable to the present US mortgage crisis, but the real casualties of a US slowdown will probably be the likes of Volkswagen, Philips and Nokia.
When I read that article this morning the first thing I thought of was EJ mentioning Philips as a company he liked and was thinking of investing in based on it's ability to weather the coming storm.
http://www.itulip.com/forums/showthread.php?p=18784#poststop
I'm curious if this changes his perception any.
Starving Steve
12-04-07, 07:14 PM
You lost me here.
The stinkers in the world's central banks are not going to lose you: They are very clear. They are going to print and print and print, and devalue, and lower interest rates, and lie, and rig, and bail-out their friends, and print, and cheat, and lower interest rates, and devalue, and misinform the markets, bamboozle the public, and print, and inflate, and devalue over and over again. Next expect new tricks like exchange controls, gold confiscations, new currencies, more drug war, etc.
What is so hard to understand?
What is so hard to understand?
I am refering to the sentence by Fred:
Debt deflation will not be permitted to develop into a self re-enforcing process that drives up the value of the U.S. dollar.
An explanation would be very much appreciated.
I am refering to the sentence by Fred:
Debt deflation will not be permitted to develop into a self re-enforcing process that drives up the value of the U.S. dollar.
An explanation would be very much appreciated.
At times of rapid inflation, such as the late 1970's, it's preferable to be a borrower, not a lender, as the cost of repaying the debt declines (the $ you use to pay back your debt are worth less than the $ you borrowed earlier, perhaps years earlier as would be the case with a mortgage debt). In a deflationary situation, its exactly the opposite, and you don't want to be a borrower.
Given the enormous amount of US $ denominated debt outstanding any "deflationary scare" that prompts holders of debt to aggressively start retiring it (or worse, default) will result in falling asset prices (as people sell them) and a rising US $ (because they need to acquire $ to pay off the loans, and increasingly prefer to hold what's left in "cash"). The "self-reinforcing" situation is the nightmare scenario for the Fed and Treasury. As asset prices fall it promotes more liquidation, which drives down asset prices more, which...you get the picture.
This is the main reason Paulson is working so hard to try to keep the US housing market afloat.
Makes total sense, but then why would lowering interest rates on the Caadian dollar and perhaps later the Euro be a logical thing to do?
Makes total sense, but then why would lowering interest rates on the Caadian dollar and perhaps later the Euro be a logical thing to do?
Because in any economy that depends on exports (and both Canada and Europe fit that description) a "strong" currency relative to your customer or competitor's currency destroys your export businesses. The pressure is on the Central Banks to lower interest rates to halt, or reverse, the rising currencies before economic activity declines further. Here's an excerpt from this morning's UK Telegraph that is a good example of the effect a strong Euro is having on aircraft maker Airbus, which is now having trouble competing with Boeing.
The comments in the early posts on this thread speak to the coming world-wide competitive devaluation of fiat currencies signaled by the Bank of Canada action. The BoE and ECB (as jk pointed out), among others, will follow soon.
Dollar threat to Airbus survivalBy Ambrose Evans-PritchardLast Updated: 4:02am GMT 05/12/2007Flight to Asia in face of falling dollar may threaten company’s factory in north Wales
Airbus has warned that it will almost certainly have to shift some wing production out of Europe as part of its emergency plan to combat the weak dollar, raising serious concerns about the fate of the UK wing factory in north Wales.
Louis Gallois, the chief executive of the Airbus parent group EADS, told the French media that the company would now have to take drastic action to ensure its long-term survival, including a relocation of plants to the dollar-zone or to Asian economies linked to the dollar.......Airbus is just one of a slew of European companies battling for its life as the euro hovers at $1.475 against the dollar, near its all-time high. Charles Edelstein, head of Dassault Aviation, said his group may have to shift every part of the production apart from final assembly and high-tech activities to "low-wage or dollar zones"."The dollar has fallen a further 30pc in two years. We cannot endure this if we continue producing and sourcing in the eurozone. The aviation industry is in a surreal situation where the WTO is examining subsidies, yet it ignores the grave distortion to competition caused by the euro-dollar rate. This could lead to the total disappearance of certain industries," he told Le Monde.German companies have also to begun to warn on the strong euro, although many have cushioned the blow so far by increasing market share in the southern Europe.Link to article:http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/12/05/cnairbus105.xml
this is a prelim. the real deal will be when the ecb blinks.
Right on cue, here they are setting the stage to blink...
ECB Officials Concerned on Growth, Open Rates Debate
By Simon Kennedy and John Fraher
Dec. 5 (Bloomberg) -- European Central Bank policy makers signaled growing concern that surging credit costs will hobble the euro-region economy, suggesting they may soon back a cut in interest rates.
ECB council member Christian Noyer said yesterday there's a ``question mark'' over initial hopes Europe would dodge the fallout from the U.S. housing slump. Executive Board member Jose Manuel Gonzalez-Paramo said the previous day lower rates would be justified if financial-market turbulence slows growth.
``For the first time we're seeing council members shifting their assessments of the economy and talking of interest-rate cuts,'' said Jacques Cailloux, chief euro-area economist at Royal Bank of Scotland Plc in London. ``I'm betting on rate cuts next year.''
While the cost of borrowing euros for three months rose to a seven-year high yesterday, advocates of lower interest rates will have a fight on their hands. With inflation running at the fastest pace in six years, ECB officials including Germany's Axel Weber and Austria's Klaus Liebscher have suggested the bank may need to raise rates rather than reduce them.
``There's a lively debate now going on within the council,'' said Nick Kounis, an economist at Fortis Bank in Amsterdam. ``For now, it stays in a wait-and-see mode.''
The ECB's 19-member council convenes in Frankfurt tomorrow, with all 62 economists surveyed by Bloomberg News predicting it will leave its benchmark rate at 4 percent.
Fed Precedent
Sentiment may be shifting toward lower rates in 2008 as the U.S. housing recession threatens Europe's economy by making banks reluctant to lend to each other. The Federal Reserve cut rates twice in the past three months to shore up growth in the world's largest economy.
The three-month euro interbank offered rate rose 2 basis points to 4.86 percent yesterday. That's the highest since December 2000 and 86 basis points above the ECB's benchmark, the widest gap since the euro was introduced in 1999.
``The credit crunch has worsened with the passing of time,'' said Michael Hume, chief European economist at Lehman Brothers Holdings Inc., who now expects the ECB to cut rates in June and September.
``We see a change in the governing council's position some time during the second quarter.''
Noyer's stance has shifted in the past three months. On Sept. 10, he told Le Monde that ``there's no reason to think that growth in the euro zone will be noticeably affected'' by market swings. Yesterday, he cited ``economic uncertainties'' and said that ``by any measure, we are facing a huge shock.''
Bad Bets
Gonzalez-Paramo rejected the argument that cutting rates would amount to a bailout of investors who lost money on bad bets. Central banks are not encouraging risk taking if they lower borrowing costs ``when financial turbulences develop into a fully fledged crisis and eventually affect growth prospects,'' he told a conference in Milan on Dec. 3.
David Brown, the chief economist at Bear Stearns International in London, said these concerns may be reflected by ECB President Jean-Claude Trichet at his press conference after tomorrow's meeting. Trichet said in Berlin today that the ECB would be ``faithful'' to its mandate of price stability.
``We expect to hear Trichet be more sympathetic to the notion of greater downside risks to euro-zone growth ahead,'' said Brown.
Euro-region finance ministers agree with the International Monetary Fund that 2008 economic growth in the area may fall short of 2 percent for the first time in three years, Joaquin Almunia, EU monetary affairs commissioner, said this week.
Still, with oil near $90 a barrel prompting workers to demand bigger pay increases, inflation risks are ``clearly on the upside,'' Liebscher said Nov. 29.
`Talking Tough'
Germany's Weber said Nov. 23 that, even during a period of market tumult, ``there are still inflation risks that may signal the need to raise rates further as tensions progressively ease.''
The ECB may continue ``talking tough'' on inflation to keep price expectations in check even as it keeps rates unchanged, said Kounis at Fortis Bank.
``We do not see inflation risks as a serious impediment to rate cutting,'' said Thomas Mayer, co-chief economist at Deutsche Bank AG in London.
The ECB will cut its benchmark to 3.75 percent by April ``to offset the ongoing tightening of credit conditions and negative implications for continued economic expansion.''
this is a prelim. the real deal will be when the ecb blinks.
And just now, 1200 GMT, the BoE MPC announced a 25 bips rate cut to 5.5%... ;)
And 45 minutes later the ECB stands pat. For now.
Remember the iTulip mantra: Debt deflation will not be permitted to develop into a self re-enforcing process that drives up the value of the U.S. dollar. Every central bank on earth understands the risks. Short term rates will be held below CPI. Anti-deflation will be achieved at least partially via global currency depreciation. This Canadian rate cut may be looked back on years hence as the starting gun for the process. Gold liked the rumor and the news.
Our Goldman Sachs trained Central Bank Governor has cut the administered rate another 50 bips this morning. So far the universe is unfolding as it should... :)
Bank of Canada trims policy interest rate half a point to 3.0 per cent
Tue Apr 22, 9:04 AM
The Canadian Press
By The Canadian Press
OTTAWA - The Bank of Canada has sliced its policy-setting interest rate by half a percentage point to 3.0 per cent. It is the fourth time the central bank has cut the overnight rate in less than five months.
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