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My 2¢ worth: Why the Canadian dollar surged near parity in 2 days

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Loonie surges The Canadian dollar has surged more than 2 cents in as many days to close in on parity with its U.S. counterpart yet again.

From a close of 97.41 cents U.S. on Wednesday, the loonie has rebounded smartly as the U.S. dollar weakened, commodities rose and markets just generally perked up on better economic news from China and the United States, buoyed too by the European Central Bank meeting today.

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"The easy tale is simply that we've got a clear resumption of risk," said Mark Chandler, head of fixed income and currency strategy for Canada at RBC Dominion Securities in Toronto.

But he noted, even with the U.S. dollar softening, the Canadian dollar was the best performing currency of the majors today.

The loonie closed at 99.61 cents today, up 1.28 cents.

ECB extends program The European Central Bank today held interest rates steady as expected, but responded to the turmoil on the continent by saying it will keep its emergency program in place longer than expected.

The ECB had planned to offer banks crisis loans until early next year, but president Jean-Claude Trichet said the central bank would continue the program "for as long as necessary," and at least through the first quarter.

"Markets were expecting big things from the ECB and appear to be initially disappointed by the lack of impactful action, with the euro falling sharply following the introductory statement," said BMO Nesbitt Burns economist Benjamin Reitzes.

"The ECB opted to do the minimum necessary, merely extending liquidity measures. President Trichet stayed mum on the bond buying program, other than saying it is ongoing.

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"Interestingly, Trichet has been adamant that the euro will come through this crisis, and yet, given the opportunity to provide further support, the ECB chose to take only modest action. It appears, that at least for now, any further public support measures for the euro area will have to come from politicians, not the ECB as many hoped."

Initial disappointment soon changed, however, as the ECB purchased Irish and Portuguese bonds in the market, traders said, buoying the euro and pushing down borrowing costs.

Steps the U.S. can take The United States is in a fiscal mess, but not a crisis, Toronto-Dominion Bank says, and should have a plan in place by 2013.

The fiscal problem, partly due to the recession, now has debt levels 20 percentage points above normal, senior economist James Marple and economist Christos Shiamptanis said in a report today, and its weak recovery will probably mean no major fiscal tightening for the next two years.

Austerity will probably slow economic expansion, though that could be partly offset by loose monetary policy and lower long-term interest rates, they wrote.

"Traditionally, the U.S. has depended on spending cuts to lower deficits," the economists said. "But, given the aging population and government commitments to entitlement programs, spending cuts alone will not be sufficient."

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Eliminating tax exemptions could help boost revenue, they added. The government could also raise Social Security contributions, and maybe even bring in an aggregate value-added tax.

"All told, there are no painless solutions," the report said.

"As the U.S. economy recovers from the recession and fiscal austerity becomes more prominent, the implication is the medium-term trend rate of economic growth in the U.S. economy is likely in the range of 2 per cent to 2.5 per cent ... Nonetheless, a well-designed austerity program that shares the pain has the best chance of succeeding."

Is recovery back on track? The global recovery appears to be picking up a little steam - not a lot, but steam nonetheless - based on recent data.

While the soft patch that followed the initial rebound has taught us not to rely too much on a string of numbers, there are developments worth noting.

"A run of improving data from the U.S., Europe and emerging Asia (especially China) has raised hopes that global growth is accelerating again after a temporary slowdown over the summer," Julian Jessop, the chief international economist at Capital Economics in London, said today in a report titled "Is the global recovery back on track?"

"Earlier fears of an imminent double-dip have certain dissipated. However, the recovery is likely to remain relatively sluggish and fitful, at least in the advanced economies, until major structural problems have been resolved and the risk of a serious bout of deflation has passed."

Still, there have been better indicators, of late, notably in the U.S., while the latest signs suggest China may be headed for a soft landing rather a crash. Manufacturing indicators have been notably more upbeat.

That's not to suggest there aren't trouble points. The crisis in the euro zone underline the risks, Mr. Jessop said, adding that there are still "fundamintal imbalances" between the surplus and deficit economies, which will keep trade tensions heightened. And the risk of deflation remains.

"Just as the summer fears were overdone, so is the current euphoria," he wrote.

"For a start, the near-term prospects for the advanced economies remain mixed. The outlook for the U.S. and the larger euro zone countries does look a little brighter. But the recovery in the U.K. is probably being flattered by spending brought forward to beat January's [value added tax] hike, while Japan's GDP is on course to contract again in the fourth quarter after the expiry of government subsidies for car purchases."

TD keeps 'em guessing Toronto-Dominion Bank is keeping investors guessing on whether it will, like National Bank of Canada , hike its dividend.

"We expect to hold more capital as a result of the new rules being finalized by regulators. However, our current levels are very strong and we do not believe we will need to raise additional capital as a result," chief executive officer Ed Clark said in a statement today as the bank unveiled its fourth-quarter results.

"Our dividend policy remains driven by our outlook for earnings, rather than our capital position, and we expect to provide the market with some clarity in that regard in the next several months."

National Bank boosted its dividend earlier this week, a result of the regulator allowing the country's bank to start payouts again, and some analysts believed TD could be next.

As for earnings, TD profit dipped about 2 per cent to $994-million or $1.07 a share, compared to $1.01-billion or $1.12 a year earlier, Globe and Mail banking reporter Grant Robertson reports today. Revenue rose to $5.017-billion from $4.718-billion.

The drop in profit was attributed to several one-time charges, along with lower earnings at the wholesale banking division, a trend seen across the banking sector in recent months.

CIBC profit dips Canadian Imperial Bank of Commerce today posted a dip in profit, taking a hit from both weak trading and investment banking fees as well as a deteriorating structured credit portfolio. But its adjusted numbers still topped estimates.

Fourth-quarter profit came in at $500-million, or $1.17 a share, down from $640-million and $1.53 a share the previous quarter. Earnings were also down from the same period in 2009 when CIBC brought in a $644-million profit, Globe and Mail reporter Tim Kiladze writes.

The biggest hit came from the wholesale banking division, which includes trading and investment banking. Total revenue for the segment fell $77-million from the third quarter and the unit reported a net loss of $56-million.

Trading income fell into a deep slump, generating just $8-million versus $84-million the previous quarter. Underwriting and advisory fees also dropped to $87-million from $108-million in the third quarter.

Streetwise columnist Boyd Erman writes this morning about the tough quarter for the securities business.

Bombardier falls shy Bombardier Inc. missed analysts estimates today as third-quarter profit and revenue slipped amid still challenging conditions for boths its commercial and business jet operations.

The plane and train maker said net third-quarter profit was $143-million (U.S.) or 8 cents per share, compared with $168-million or 9 cents in the same period for the previous year, Globe and Mail reporter Bertrand Marotte writes from Montreal.

Revenue slipped to $4-billion from $4.6-billion in the quarter.

On the aerospace front, Bombardier delivered a total of 53 aircraft, down from 61 for the same period last year.

"Booking activity for business jets was soft, coming in at 13 net orders compared with 14 aircraft in [the second quarter]," said Desjardins analyst Benoit Poirier.

"This reflects a higher number of gross orders (27 vs. 26), but also a higher number of cancellations (14 vs. 12).

"In our view, order activity remains soft and will need to pick up in order to replenish the backlog. However, our estimates already reflect a longer-than-expected business jet recovery and a further production cut in Learjet and Challenger."

Canadian Natural revamps Horizon plans Burned once by scorching inflation in the oil sands, Canadian Natural Resources Ltd. has reshuffled plans to expand its Horizon project, throwing out firm schedules and vowing to proceed only if it can contain costs.

Rather than moving forward in several major steps as it expands from 110,000 to 250,000 barrels per day, the company has instead split its plans into dozens of smaller steps, each of which can be individually halted if costs begin to rise or labour comes into short supply, The Globe and Mail's Nathan VanderKlippe reports from Calgary.

CNRL will proceed with five major components "which will be further broken into 46 individual projects that Canadian Natural can, at our discretion, start or stop according to market conditions," company president Steve Laut said in a conference call today.

Gildan unveils dividend Gildan Activewear Inc. unveiled its first dividend today as it posted record profits and revenues for the fourth quarter.

The Montreal-based T-shirt maker also said that strong sales in the United States, added to other factors, helped offset the impact of surging cotton prices.

"Although selling price increases have been implemented in the U.S. wholesale distributor channel since July, to offset inflation in cotton and other input costs, these price increases were not applied to back-orders already placed at the time of implementing the increases, and therefore only partially offset the impact of the significant cotton cost increases in the quarter," the company said.

Gildan announced its first quarterly dividend, of 7.5 cents (U.S.).

Gildan earned $56.8-million or 47 cents a share, compared to $42.4-million or 35 cents a year earlier.

Still, its shares slid as its outlook for next year was shy of expectations.

China mulls huge investments China is mulling the possibility of pumping up to $1.5-trillion (U.S.) - yes, with a T - into seven industries it considers strategic, the Reuters news agency reports today.

Such an investment, which would be made over five years, would be to speed up the country's change into a leading source of "high-value" technology, the report said.

The industries involved would include alternative energy, biotech, information technology, equipment production, advanced materials, alternative-fuel cars and environmentally friendly technologies, Reuters said.

The amount cited is equal to about 5 per cent of the country's GDP, leading analysts to doubt the size of the plan, according to the report.

Which country has the best approach? Iceland, the poster child of the meltdown, believes its approach to its crisis will prove to have been a smarter move than the measures undertaken by Ireland.

Here's the difference: Iceland chose to let private investors, the bondholders, take a hit when its banks tumbled, while Ireland has gone the route of an €85-billion bailout to prop them up.

Now, according to Bloomberg News, the people of Iceland are looking at a smaller debt burden than those in Ireland. Iceland expects a deficit equal to 6.3 per cent of GDP this year, well short of Ireland's 32-per-cent deficit. The decision to force bondholders to take the hit may help Iceland recover at a faster pace, Bloomberg said.

"The difference is that in Iceland we allowed the banks to fail," the country's president, Olafur Grimsson, told Bloomberg Television. "These were private banks and we didn't pump money into them in order to keep them going; the state did not shoulder the responsibility of the failed private banks."

Iceland also took an IMF bailout, but not for the banks.

From today's Report on Business

And, read our Streetwise blog and Your Business section.

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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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