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Economist slams Bank of Canada over loonie's rise

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Economist takes on Bank of Canada U.S. economist Carl Weinberg today slammed the Bank of Canada for hiking interest rates, in turn pushing up the Canadian dollar , which he linked to poor manufacturing numbers in the most recent report.

"Central bankers around the world, there is a lesson for you in this report: Beware the retraction of monetary accommodation - a.k.a. hiking interest rates, or otherwise tightening monetary conditions - when the largest economies of the world are not," the chief economist of High Frenquency Economics said in a research note.

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"You could get your head handed to you, especially if you are a small, export-dependent nation."

Statistics Canada reported earlier this week that manufacturing sales slipped 0.6 per cent in September. New orders plunged, largely because of the transportation sector.

"We figure the dip in manufacturing production is linked to the dip in exports," Mr. Weinberg said.

"They were 10.5 per cent higher than a year ago in September, but they remain 25.3 per cent lower than their peak.

"The export debacle can be directly linked to a number of factors, including subpar growth in the United States, structural changes in the North American auto industry and the collapse of U.S. demand for home construction materials and energy in volume terms. It is also linked to the appreciation of the loonie, now flirting with par against the U.S. dollar."

Mr. Weinberg links the dollar's rise to the Bank of Canada's three increases in its benchmark overnight rate since the recession's end "in a battle against inflation that clearly does not exist."

"So the trade balance is now in deficit, exports are in the garbage can and manufacturing has been devastated."

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Other economists have also linked the weakness in manufacturing and a swelling trade deficit to the loonie's rise but also to sputtering demand in the United States and the attractiveness of Canadian assets to foreign investors given the country's economic and fiscal standings.

At its last policy meeting in mid-October, the central bank held its key rate steady at 1 per cent, following three hikes. And it did note the softness in global economies and that fact that inflation was running slightly below its forecast. It also noted that any further tightening would have to be "carefully considered."

Its key rate is still at historically low levels and, the central bank noted when it last hiked rates in early September, "as a result of monetary policy measures taken since April, financial conditions in Canada have tightened modestly but remain exceptionally stimulative."

Markets in a happier mood Global markets are in a far better mood this morning as investors cheer the possibility of a bailout for Ireland and the return of General Motors Co. to trading in New York and Toronto.

North American markets jumped at the open, following stronger showings in Asia and Europe.

While GM of course has many challenges ahead, analysts are upbeat on the auto maker and its strong comeback from the depths of the crisis.

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GM yesterday priced its common shares at $33 apiece amid strong demand, and is on track for history's biggest initial public offering ever depending on how events play out. Its stock jumped at the opening this morning.

Morningstar analyst David Whiston, for example, values GM stock at $44, according to Reuters, and "I think it shows that investors think that the worst is over and I agree."

Ireland expects huge loan The chief of Ireland's central bank expects the European Union and International Monetary Fund to come to the embattled country's aid with a huge loan.

Patrick Honohan's comments on state television today came as Irish officials prepared for a meeting with a joint EU-IMF mission to discuss a rescue package, even though the government is resisting such a deal.

"We're talking about a very substantial loan for sure - tens of billions, yes," Mr. Honohan said.

Ireland's troubles, which reignited Europe's debt crisis, have dogged stock and currency markets as investors feared they would spread to other debt-burdened countries.

"Ireland begins talks today with the EU and the IMF, with a focus on restructuring its banking sector," said Scotia Capital economists Derek Holt and Gorica Djeric.

"Despite Ireland's resistance, it is likely that financial assistance program will be activated, drawing funds from the European Union's and the IMF's comprehensive financial assistance pool of €750-billion, set up in May.

"It is worth noting that Ireland is fully funded until mid-2011, but its banking sector is increasingly more reliant on the ECB funding. With no immediate liquidity issues at present, a potential bailout seems to be more of a political decision, on concerns over possible spillover effects on the euro zone periphery's financial stability stemming from deteriorated investor sentiment."

Will the risk rally last? As stocks, gold and other commodities rally today, observers wonder whether the rally can last. Did the Irish central bank chief's comments spark a knee-jerk relief rally, or do they represent something with more teeth where Europe is concerned?

"The Irish issue dredges up memories of the crisis of confidence in the euro zone of earlier this year, a dynamic well noted by euro zone policymakers as it is obvious that they are not interested in whether Ireland already has sufficient funding for the near future (which it does), but rather that the upwards pressure on all weak euro zone nation sovereign yields is arrested with finality," said Scotia Capital currency strategist Sacha Tihanyi.

"This is key not only for short term sentiment, but also lays down a blueprint for dealing with other countries in the future. Policy makers seem intent to show the market that access to support will be forced whether it is needed or not and despite national pride, for the greater good of the euro zone.

"A coordinated and consistent approach, unlike that seen in dealing with Greece earlier this year, goes a long way to preventing further strains related to Spain, Portugal, Greece or some unknown future banking/fiscal problem. Thus this may imply that the relief rally in the making has legs, absent verbal bungling by European politicos or increased worries that the pool of money standing behind weak euro zone nations is truly large enough."

Western Coal in merger talks Vancouver's Western Coal Corp. is in talks with a U.S. counterpart to form what they say would be one of the biggest publicly traded producers of metallurgical coal in the world.

Walter Energy Inc. , which producers coking coal for the steel industry, is in exclusive talks to acquire Western Coal in a deal that values the company at $3.3-billion, the companies said in a statement today.

The cash-and-stock deal, if concluded, would offer Western Coal stockholders $11.50 a share. Western Coal's biggest shareholder, Audley European Opportunities Master Fund Ltd., would sell its holdings of almost 20 per cent to Walter, which is based in Tampa, Fla.

"The combination would create one of the world's largest pure-play publicly-traded producers of metallurgical coal with geographically diversified assets in Canada, the U.S. and the U.K. and with strong market positions in Asia, South America, North America and Europe," the companies said.

The coal sector is suddenly on fire. Just this week, Vallar acquired stakes in two Indonesian coal mining firms for $3-billion (U.S.). And Caterpillar Inc. moved to boost its presence in the mining industry, partly related to demand for coal, with a takeover bid for equipment manufacturer Bucyrus.

Strong demand from emerging economies such as China is peaking interest in the coal industry, The Financial Times reports today, noting that prices for thermal and coking coal have surged since the financial crisis.

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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