Category: Canada

Other than the usual stuff about the S&P 500 being up a huge amount for the year, perhaps the unexpected financial highlight for most Canadians is in the following chart:

Looking at the other major currencies, the Euro has appreciated slightly against the USD over the year (from US$1.32 to US$1.38 per Euro), while the Yen has weakened considerably, with 87 Yen being one USD at the beginning of the year – now this is 105!

The Chinese Yuan strengthened against the USD of the year, 6.23 CNY per USD, while today it is 6.07. This continues a very slow trend of appreciation for the Chinese currency since they changed their monetary policy since 2010:

Some questions for 2014 will be:
– Will the Canadian dollar continue to downtrend?
– How low will the Yen go before Japan collapses its economy?

I have been watching the chart of the Canadian dollar. Over the past three years it has exhibited a surprising amount of non-volatility, trending roughly between 96 to 103 cents on the US dollar in the last year:

This is compared to a currency such as the Yen which has had some obvious devaluation going on over the past half year:

This leads to the obvious question of whether the Canadian dollar is still in a range or whether there is something going on that will trend into a further decrease in the dollar. Typically the dollar has been linked to the fortunes of the commodity market, and the general commodity market hasn’t really gone anywhere over the past year, so one would think this is part of a trading range as opposed to some breakout on the downside.

I continue to hold a majority of my holdings in US-denominated securities and despite the fact that the US federal reserve is doing its best to turn its currency into toilet paper, I would expect the US currency to be better toilet paper than other world currencies out there. I am guessing the phrase “in the world of the blind, the person with one eye sees all” is the most appropriate here.

The Bank of Canada announced they were leaving interest rates unchanged. The salient paragraph was the last one:

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. While some modest withdrawal of monetary policy stimulus will likely be required over time, consistent with achieving the 2 per cent inflation target, the more muted inflation outlook and the beginnings of a more constructive evolution of imbalances in the household sector suggest that the timing of any such withdrawal is less imminent than previously anticipated.

This basically means that short term rates are not going to increase for at least half a year, but likely for the rest of 2013. BAX quotes reflect a slight expectation of higher rates approaching the end of 2013:

Month / Strike	Bid price	Ask price	Settl. price	Net change	Open int.	Vol.
Open interest: 543,666				Volume: 171,501
13 FEB	0	0	98.745	0	0	0
13 MAR	98.710	98.715	98.710	0	101,834	14,761
13 APR	0	0	98.695	0	0	0
13 JUN	98.710	98.720	98.720	-0.010	119,478	45,715
13 SEP	98.680	98.690	98.690	-0.010	113,065	42,119
13 DEC	98.640	98.650	98.660	-0.010	90,020	34,371
14 MAR	98.590	98.600	98.610	-0.010	56,655	19,399
14 JUN	98.540	98.550	98.550	-0.010	31,336	9,242
14 SEP	98.480	98.490	98.490	0	14,456	3,892
14 DEC	98.410	98.430	98.430	-0.010	9,608	1,602
15 MAR	98.350	98.370	98.370	0.070	4,925	94
15 JUN	98.280	98.300	98.300	0.080	1,185	17
15 SEP	98.220	98.240	98.240	0.070	754	182
15 DEC	98.150	98.170	98.170	0.060	350	107

The important figure is the 10-year government bond and its yield has not gone anywhere over the past year:

The implications here is that if there are going to be disruptive changes in asset prices, it is unlikely to result from interest rate changes. This would suggest that the REIT market and other yield-driven markets will continue to receive demand as investors clamour for yield. I also suspect that real estate asset prices will continue to exhibit a slow deflation rather than a bubble popping.