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Swiss National Bank loads up on Canadian dollars, adding to woes of Canadian exporters

These are stories Report on Business is following Wednesday, Oct. 31, 2012.

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SNB buoys loonie
The Swiss National Bank is loading up on loonies, playing into the troubles of Canadian exporters struggling with a strong currency.

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The Canadian dollar now represents 4 per cent of the central bank's foreign exchange reserves, which are hefty at 429-billion Swiss francs or the equivalent of $463-billion (U.S.).

That 4 per cent, as of the third quarter, is up from 3 per cent, the SNB said today.

The Swiss National Bank is representative of others with large reserves that are diversifying beyond the U.S. dollar and the embattled euro, said senior currency strategist Camilla Sutton of Bank of Nova Scotia.

The euro has dropped to 48 per cent of the SNB's holdings from 60 per cent, while the greenback has climbed to 28 per cent from 22 per cent.

The Swiss have huge reserves, and won't allow the franc to appreciate against the euro beyond a certain point. The SNB has, since 1999, had "significant exposure," to the loonie, as the dollar is known in Canada, Ms. Sutton said.

Other central banks have also boosted their Canadian dollar holdings.

This "safe-haven flow" is a problem for Canadian exporters in that it helps to buoy the currency, making their goods more expensive in foreign markets, and it is an issue highlighted by the Bank of Canada. Of course, the Canadian dollar is moving for several reasons, among them a weaker U.S. currency that is partly the result of stimulus measures from the Federal Reserve, and money flowing in given Canada's economic and fiscal outlook.

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Economy stalls
Canada's economy stalled in August, hit by a 'one-two punch' and slipping 0.1 per cent in the first monthly decline since February.

Observers had generally expected gross domestic product would rise by 0.2 per cent.

The decline, Statistic Canada said Wednesday, was largely the result of lower output in the manufacturing, mining and energy sectors. Mining output dropped 2.8 per cent, the federal agency said as activity declined at copper, nickel, lead, zinc, gold and silver ore mines, though that was affected by scheduled maintenance. Output at potash mines also slipped.

The oil sector also dropped, outpacing the gains in natural gas, also partly due to maintenance.

Manufacturers suffered a decline of 0.6 per cent, a setback from July's gain of 0.9 per cent.

"While the result was weighed on by temporary shutdowns in the mining sector (which carved 1 tick from the headline), most sectors were lower than expected, so we can't brush this off as driven by special factors," said deputy chief economist Douglas Porter of BMO Nesbitt Burns.

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"The economy was hit with a one-two punch of deep declines in both mining and manufacturing (which fell 0.6 per cent in a month that real manufacturing sales were reported up 1.8 per cent)," Mr. Porter added. "... Fully 10 of the 18 Canadian industrial sectors saw output drop in August, so this was no fluke. While some temporary factors weighed on activity in August, the main message here is that the economy is struggling to churn out any growth whatsoever."

In a sign of the times in Canada's cooling housing market, construction dipped, while "the output of real estate agents and brokers fell 6.6 per cent in August, down for a fourth consecutive month," Statistics Canada said.

Lower stock trading also helped push down the financial services industry, by 0.3 per cent, after four consecutive months of gains.

Mr. Porter believes there was a "modest rebound" in September, though expects fourth-quarter growth of below 2 per cent.

The final third-quarter showing is also expected to come in below that mark.

"Over all, today's number makes a Q3 GDP print of 1.8 per cent (our previous call) unlikely, and sets the quarter up for growth closer to 1 per cent, the Bank of Canada's recently revised estimate," said Emanuella Enenajor of CIBC World Markets.

"The bank sees growth accelerating thereafter, and we expect the temporary resource-sector weakness to also unwind, supporting stronger growth going forward."

Scotiabank pegs CEO successor
Canada's Bank of Nova Scotia has set up a clear successor to current chief executive officer Rick Waugh by naming Brian Porter president, Streetwise columnist Boyd Erman reports.

In the Bay Street parlour game of bank succession, Scotia has long been one of the easier picks because of the emergence of Mr. Porter as a front runner. At other banks, such as Toronto-Dominion Bank and Canadian Imperial Bank of Commerce, it is not so easy to call a likely winner in the CEO derby.

At Scotia, there were other names that had to be in the running. Among them, people who watched the bank mentioned Chris Hodgson, who runs wealth management and who had previously overseen Canadian banking.

Yoda explains market reaction
Dipping today, Disney shares are. Follows the $4.05-billion (U.S.) deal for Lucasfilm, it does. Buying the Star Wars creator, Disney is, for half in cash and half in stock.

"The Disney Co. has been effective at reaching young girls through their princess franchise, and will now inspire a generation of young boys with tales of interstellar adventure and earthbound exploration," said associate professor Mark Fuller of the Schwartz School of Business at St. Francis Xavier University.

"It is a win for consumers, a win for investors and likely a win for Lucasfilm employees with the announcement of three more entries in the Star Wars movie franchise, beginning in 2015. It is a great strategic move for Disney and begs the question of what the next big brand acquisition will be."

(Amaze – or annoy – your friends and colleagues with this online speak-like-Yoda converter.)

Potash Corp. in talks with Israel
Potash Corp. of Saskatchewan is in discussions to take full control of Israel Chemicals.

Israel Corp., the parent company, said today the Canadian group is talking to the Israeli government about a full takeover of the smaller concern, in which it already holds almost 14 per cent, according to reports.

Israel Chemicals is worth some $15-billion (U.S.), Reuters reported from Jerusalem.

"The company confirms it is aware that Canada's Potash is in talks with various government agencies that included a meeting with the prime minister regarding examining the possibility of merging ICL with Potash," Israel Corp. said in a statement, according  to Reuters.

Europe's troubles mount
Europe's troubles continued to mount today with new figures showing jobless levels still rising.

In the euro zone, the monetary union of 17 countries, unemployment inched up in September to 11.6 per cent, from 11.5 per cent in August, the Eurostat agency said.

Among all 27 countries in the European Union, the jobless rate held steady at a still high 10.6 per cent.

Young people have been particularly hard hit, with youth unemployment now at about 23 per cent in both the euro zone and the wider EU.

The individual measures are the most troubling. In Greece and Spain, for example, about one in four people can't find work, and among young people it's more than half.

In straight number terms, youth unemployment climbed by 275,000 in the euro zone and 164,000 in the EU.

The stronger nations such as Austria, Luxembourg and Germany, though, boast far lower rates ranging from 4.4 per cent to 5.4 per cent.

Inflation in the euro zone, meanwhile, eased to 2.5 per cent in October from 2.6 per cent a month earlier, according to Eurostat.

Finance ministers from across the euro zone were holding  a conference call today, expected to discuss Greece's troubles, in advance of a November meeting.

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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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