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Why loonie is perking up: A lot to do with U.S. dollar, a little with PQ defeat

These are stories Report on Business is following Tuesday, April 8, 2014.

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Loonie perks up
The Canadian dollar shot higher today, buoyed by a raft of unrelated issues though largely by the slumping U.S. currency.

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The loonie, as the country's dollar coin is known, was at almost 91.6 cents by late in the day.

A weaker U.S. dollar was the main factor, and so-called commodity currencies are generally picking up, said chief currency strategist Camilla Sutton of Bank of Nova Scotia.

Feeding into the optimism was a more upbeat business outlook survey released yesterday by the Bank of Canada and, with a modest impact, the majority win by the Quebec Liberals.

Markets had expected the Liberals to oust the PQ, so the impact on the loonie was muted. Having said that, markets don't like uncertainty so you've got to factor that in, as well.

And you can bet the dollar would have been whacked had the PQ, which raised the referendum issue during the campaign, won a majority.

"While Quebec has somewhat weaker metrics than Ontario, its price and demand has proven remarkably resilient to another attempt at separation," senior currency strategist Sébastien Galy of Société Générale said of the bond market.

"Compared to the early 1990s, the attempt proved far less credible," he added in a research note.

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"Quebec paper has already rallied as support for the PQ weakened in polls."

The majority win by the Liberals - and the end of referendum speculation - means political stability in Quebec, which "is a clear positive for the flagging economy," said senior economist Robert Kavcic of BMO Nesbitt Burns, citing the pick-up in the loonie.

"In the bond market, Quebec 10-year spreads have narrowed somewhat versus Ontario in recent days as the polls turned in the Liberals' favour - this result should only further temper concerns in the bond market, though sights will now turn to a Liberal budget," he added.

Economists at Toronto-Dominion Bank agreed.

"From a financial market perspective, last night's result is likely to be well received," they said in a report today.

"It fully removes from the table the risk of another sovereignty referendum in the province, at least over the next four years. Furthermore, the election of a strong majority government increases certainty surrounding government policy since budgets and other key legislation can be passed without support from opposition parties."

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This also came as equity markets rebounded.

What observers are saying
The election of a majority Liberal government in Quebec and the decisive defeat of the PQ signal a turn to greater economic stability and enhanced credibility on the fiscal front in the province, observers say.

"Suffice it to say that the sovereignty issue was all but put to bed last night," BMO Nesbitt Burns chief economist Douglas Porter said in a research note today, The Globe and Mail's Bertrand Marotte reports.

While investors had followed the polls and largely knew what to expect, last night's results were firm.

"Certainly from a foreign investor perspective, they are more comfortable with the idea of the separation issue fading into the background," said David Watt, chief economist with HSBC Holdings.

"We still need foreign investment having a strong confidence in Canada."

The Liberals' promise to relaunch the Plan Nord to bolster the mining, energy and forestry sectors bodes well for getting more foreign direct investment in metals and minerals in northern Quebec, said Mr. Watt.

Stand on guard, IMF warns
The Canadian government should be ready to counter any further weakening of economic growth, which easily could occur, the International Monetary Fund says in its latest assessment of the global economy.

The Washington-based IMF shaved its forecasts for this year and 2015 slightly, reflecting the stumbles of a number of bigger emerging-market economies, including Russia, which is dealing with sanctions and capital flight because of its decision to claim the Ukrainian region of Crimea, our Washington correspondent Kevin Carmichael writes.

Despite the modest downgrade, the tone of the fund's spring World Economic Outlook is cautiously optimistic, mostly because of the resilience of the U.S., which is poised for its strongest economic growth since before the recession.

Canada's gross domestic product will expand 2.3 per cent this year, slower than Britain's 2.9-per-cent rate and 2.8 per cent in the United States. Canada will trail its fellow Anglo-Saxon economies in 2015, too, the IMF predicts.

Housing starts sink
Housing construction in Canada took something of a breather in March as condo construction slowed.

Housing starts sank last month to an annual pace of 156,823 units from 190,639 in February, Canada Mortgage and Housing Corp. said today.

Construction starts on multiple units, such as condominiums and apartments, fell by 25.5 per cent to 87,372. Starts on single detached homes also slipped, but by far less at 5.4 per cent.

These numbers are deemed volatile, and so the federal agency also provides a six-month moving average.

On that basis, starts slipped to 184,476 in March from 191,126 a month earlier.

"The sharp decline in starts is a bit surprising considering the uptrend in building permits in prior months and the improvement in the weather in March," said senior economist Krishen Rangasamy of National Bank of Canada.

"But one month doesn't make a trend, as shown by the rebound in February 2013 after a similar slump in the prior month. While, this time too, we're expecting a rebound, we remain cautious about the outlook for the Canadian housing market this year given the significant gains (in both starts and prices) in recent years."

Notable in today's data was the drop in Toronto, a focus of concern given the condo market.

In Canada's biggest city, monthly starts plunged to just below 17,000 from more than 38,000 in February. On a six-month basis, they dipped to 34,537 from 35,895.

Starts in Vancouver, also a concern, rose to 20,637 from 15,121. They were relatively flat using the six-month measure.

Separately, Statistics Canada reported today that building permits issued by cities across the country fell 11.6 per cent in February, having climbed 8.1 per cent the month before.

February's drop was largely because of fewer permits for condos and apartments.

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Editor's note: The decline in February building permits has been corrected from the original article.

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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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