Monday, January 31, 2005
Bank of Canada leads off two weeks of key rate meetings
The Bank of Canada kept its key overnight lending rate unchanged at 2.5 percent and signaled it may not raise borrowing costs because a stronger Canadian dollar is slowing the economy. The currency dropped against its U.S. counterpart after the Bank removed from its statement the key phrase "a considerable amount of monetary stimulus remains in the Canadian economy." Similar phrases over the last three statements had indicated the bank was prepared to raise interest rates again after increasing them in September and October by 25 basis points each. The gap between Canadian and U.S. policy rates may be eliminated for the first time since April 2001 if the Federal Reserve - as expected - increases its Fed funds rate by another 25 basis points at its February 2nd meeting.
Canadian exporters are having a tough time coping with their currency's rise, and further rate increases could spark another rally in the dollar by boosting international demand for the country's bonds. Exports have fallen in four of five months through November. The higher Canadian dollar squeezes Canadian companies by making their products more expensive to foreign buyers and encouraging domestic consumers to buy imports.
Only three years ago, the Canadian dollar was at a record low of 61.76 U.S. cents. The currency surged 19 percent from mid-May 2004 to November 26th when it reached 85.32 cents, the highest since January 1992. The surge led to speculation the Canadian economy might suffer - about 40 percent of output is tied to exports which cost more abroad when the currency appreciates. The currency's gain was bolstered by soaring commodity prices and on optimism that Canada will log budget and trade surpluses in contrast to the U.S. which is posting record deficits.
More recently, the Canadian dollar fell to its lowest level in a month against its U.S. counterpart as investors eyed converging interest rates and booked profits ahead of the FOMC meeting Tuesday and Wednesday. The Fed is expected to raise rates by 25 basis points to 2.5 percent, obliterating the interest rate differential between the two countries. But the U.S. dollar edged downward after the Bank of Canada signaled in a policy update that it still needs to raise interest rates, though at a slower pace due to currency strength.
Global Markets
Equities struggled to recoup early January losses and pull even with end-of-year values. Earnings reports continued to please and disappoint - and even merger news didn't always distract investors. Investors instead fretted about parliamentary elections in Iraq on January 30th and also about an OPEC meeting that day where members will discuss output quotas for the second quarter. And currency traders responded to rhetoric on any and all issues that might affect the outcome of the Group of Seven meeting in London on Friday and Saturday. On the week, 11 of 12 indexes followed here were up. With one more day of trading remaining in January, six indexes are up on the month and seven are down.
Global Stock Market Recap
Europe and Britain
European auto stocks were hit after Germany's automotive industry association said sales of vehicles in Germany would decline this year. January German car market sales have been "disappointing," according to the association. German sales are expected to fall to about 3.25 million vehicles this year after increasing 1 percent last year to 3.27 million units. On the week, only the DAX was down. On Friday, two events addled investors. The first was lower-than-expected U.S. GDP growth for the fourth quarter. GDP grew by an estimated 3.1 percent annualized rate. It should be noted that because much of the December data have yet to be reported, this estimate is subject to revisions - both up and down. The second event was the blockbuster merger announced between Proctor & Gamble and Gillette. Investors appear to be fretting over the enormous buying power and sway over retailers that the combined company would have.
Asia/Pacific
All six Asia/Pacific indexes followed here were up last week, helping to regain some of the losses incurred earlier in the month. A number of cross currents buffeted Japanese stocks. Bank stocks were up after a Financial Services Agency report showed lenders had �23.8 trillion of bad loans as of September 30th, 11 percent lower than in March 2004. Offsetting this good news were disappointing reports from the technology industry. Several electronics companies, including Sony, NEC, Fujitsu and Nintendo, lowered their full-year profit forecasts, reflecting falling demand. This sector had been one of the driving forces of Japanese growth. And exporter stocks such as Honda and other auto manufacturers are routinely battered by the yen/dollar exchange rate, especially when the yen appreciates. Concerns about the stronger yen's impact on earnings, particularly on automakers, have loomed for several months. A stronger Japanese currency decreases the value of a company's earnings outside Japan when translated into yen. With one more trading day remaining in January, Japanese and Hong Kong indexes remain below their December 31st levels.
Currencies
Foreign exchange trading was dominated by 'what ifs' last week. With a Group of Seven meeting looming on February 4th and 5th, traders speculated on whether the group would go beyond their previous statement made a year ago at their Boca Raton meeting. In the statement, the finance ministers said:
February debates
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