Loonieviews June 16, 2014


Russia tapdances all over Eurozone

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

RECOMMEND COMMENT

• Russia puts pre-pay policy on Ukraine for gas
• Ontario weighs on Canada’s AAA rating
• Northern Gateway announcement may support loonie

The FX markets are a tad nervous to start the week, with unrest in Iraq and rising Russian and Ukrainian tensions threatening a shift into risk aversion trading. There was some evidence of safe haven flows in Asia, with JPY edging higher. At the same time, global equity indices retreated. Cable traders weren’t phased by risk aversion as they drove GBPUSD to resistance at 1.7000. It has since retreated but the Bank of England Governor Mark Carney’s hint that rates could increase sooner rather than later will keep it bid. The Federal Open Market Committee (FOMC) meeting on Wednesday should dampen enthusiasm for FX activity ahead of that time. The big jump in foreign investment in Canada for April (Actual USD 10.13 billion, forecast USD 4.27 billion vs. March outflow of USD 1.41 billion) was ignored by traders but is evidence that perhaps the global view of the Canadian dollar has improved somewhat.


Who shut the gas off?

When the Rolling Stones sang "Jumpin’ Jack Flash, it’s a gas, gas, gas", I don’t think Gazprom was on their radar. Russia’s Gazprom has created a stink by announcing that Ukraine must pre-pay for all gas supplies. No-one should be surprised at the move considering that the G7 has levied sanctions on Russia. The two most vocal proponents of sanctioning Russia i.e Canada and the USA, have no "skin in the game" and won’t be affected by the decision unlike one-third of EU consumers. The Russians are receiving support, indirectly, from the Islamic State in Iraq and Levant (ISIL), a moniker used to identify an Al Qaeda splinter sect that is wreaking havoc in Iraq and causing a surge in Brent crude prices. The double whammy of rising gas and oil prices in the Eurozone jeopardises the weak economic recovery and may test the resolve of the EU to support Ukraine. It should also add additional strain to the 1.3500 EURUSD support zone.

Chart: Daily Brent Crude

Source: Saxo Bank


Key US data releases

This week’s US economic data will be overshadowed by the Federal Reserve Open Market Committee (FOMC) meeting and press conference.

Tuesday: May CPI (Forecast 2.0 percent, Ex-food and energy 1.8 percent, year-over-year). The proximity of the FOMC meeting will limit any impact from this data.

Tuesday: Housing Starts (Forecast 1.034 million, building permits 2.075 million). Small upside surprise on back of clearing of winter "backlog".

Wednesday: FOMC interest rate decision and press conference: Market will be connecting the dots to see if timing of a rate increase is moving forwards or backwards.

Thursday: Conference Board March Leading Indicators (Forecast, 0.5 percent)Jobless Claims (Forecast 314,000).

Key Canadian data releases

This week’s Canadian economic data releases are all back loaded to Friday.

Friday: CPI (Forecast 2.1 percent, Core 1.5 percent, year-over-year) Above consensus print may provide support for the Canadian dollar although the Bank of Canada believes rising inflation is temporary. Retail Sales (Forecast 0.4 percent, ex-autos 0.3 percent, month-over-month). The risk is for an upward surprise on a rebound for weak April data supported by rising car sales.

Put that in your pipeline and ship it

Enbridge’s Northern Gateway pipeline project to Canada’s Pacific coast, a USD 6.5 billion dollar rebuttal to the USA’s dithering on the XL pipeline could obtain federal government approval this week. It is a pet project of Prime Minister Stephen Harper and a way for Canada to diversify its energy exports away from the US and into Asia. Approval is one thing but getting it built is another. The Rocky Mountains are probably the easiest hurdle to jump; the harder ones include opposition from environmentalists and First Nations groups. The news may also provide a bit of support to the Canadian dollar on the back of potential economic benefits.

Is Ontario jeopardising Canada’s AAA rating?

The province of Ontario is merely one of ten provinces and three territories that together make up Canada, and Canada is one of only 11 countries that have an AAA credit rating. That AAA rating could be in jeopardy sooner than you think. Ontario voters re-elected the Liberal party for the fourth time in a row. In the past, a booming manufacturing sector, anchored by the auto industry, masked the fiscal irresponsibility of a succession of governments. But in the words of Bob Dylan, "the times, they are a-changing". Since 2002, Ontario’s manufacturing sector has shrunk by 30 percent. During that same period the provincial debt ballooned from CAD 132 billion in 2003 to CAD 258 billion estimated in the 2014 budget. It is hard to see how this debt can be serviced when high-paying manufacturing jobs are replaced with minimum wage/zero benefits and service sector employment. Moody’s has already expressed concern about Ontario’s spending while S & P could trim Ontario’s AA negative rating. Ontario is 39 percent of the population of Canada or more than one-third of the As in Canada’s Triple A rating. Something to keep in mind, eh?

Chart: Ontario Net Debt

Source: Fraser Institute

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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