CAD Stayed In Narrow Range Last Week, IMF Reduces Global Growth Outlook

Last week was short on any news that could move exchange rates. The loonie stayed in a narrow range of barely 80 basis points with respect to the USD, while the euro moved in a range of approximately 170 basis points. One news item of interest last week was the International Monetary Fund (the IMF) reducing its outlook for global growth in 2013, from 3.9% to 3.6%.

Spain made headlines again when Standard & Poor’s downgraded its credit rating to just a notch above junk status. The news hit Spain just as it passed its most austere budget ever, its people were protesting in the streets, and Catalonia was threatening to break away from the rest of the country. Paradoxically, this year’s Nobel Peace Prize was awarded to the European Union.

Canada
This will be a slow week in Canadian news. It begins on Thursday when Wholesale Sales figures will be released, followed by Consumer Price Index data for September on Friday. Analysts are forecasting year-onyear inflation to come in at 1.2% (YoY).

United States
A busy week in U.S. news begins today with Retail Sales for September. Economists are expecting a reading of 0.8%. On Tuesday the Consumer Price Index for September will be released; analysts expect it to be 1.8%. This is very low for a country that embarked on a third round of quantitative easing in September; see the section on the loonie for a more detailed report. On Tuesday evening we will be glued to our sets for the second U.S. presidential debate. During the first debate, the candidate Mitt Romney overshadowed the incumbent, Barrack Obama. We will see whether the President will be able to mount stronger attacks this time around.

International
The week in international news begins tomorrow with the release of the Consumer Price Index for the eurozone, followed by ZEW Economic Sentiment Index results for the Eurozone. On Thursday we will have Chinese GDP data for the third quarter (YoY). Last week, a rumour began circulating that the Chinese government wanted to cut its Reserve Requirement Ratio (RRR) again (the government issued an immediate denial). We will see whether China is waiting for the GDP figure before it decides to act. Also on Thursday, China will release Retail Sales data.

The Loonie
The central banks are coming to the rescue of the global economy by making massive security purchases. The Fed’s latest intervention (QE3), which involves USD 40 billion of purchases per month for an indefinite period, is a prime example. The idea is to flood the market with liquidity in order to stimulate private investment and consumption. Normally this should boost economic activity and drive up inflation, but this has not been the case. The problem is that central banks lend neither to consumers nor to businesses; the flow of liquidity is actually controlled by commercial banks, which may decide to lend this newly available money or use it to strengthen their balance sheets.

Since 2008 there have been two obstacles: first, commercial banks are more nervous about lending in a risky economic environment and, second, new regulations taking effect are pushing them toward maintaining more conservative capital structures. In short, commercial banks are absorbing some of the funds injected by the central banks. In the U.S., the monetary base, which is the Fed’s measure of available liquidity, has more than tripled over the last 5 years, and this does not take the latest round of quantitative easing into account (data not available). This is represented by the blue area in the following graph. The red line shows changes in commercial and industrial loans in the U.S., which are clearly lagging.

To Read the Entire Report Please Click on the pdf File Below.