A Few Thoughts on Canada

The Bank of Canada meets Wednesday. 
Last month officials acknowledged that growth could be somewhat lower than
previously anticipated.   Those fears have likely materialized, and the central bank may shave
its growth forecasts for this year and next.  This means that it will take Canada longer to close its output
gap.  It not only pushes out the first hike, but it leaves the door ajar for further easing if the economy falters

Canada’s overnight lending rate remains at
0.50%, where it has been since July 2015.
  During the Great Financial
Crisis, the overnight rate had fallen to 0.25%.    While the
Canadian economy may need additional stimulus next year, many economists are divided how it will be deliveredSome see the
possibility of a rate cut, while others expect more fiscal support.

Canada reported its August international
securities transactions earlier today.
  Foreign investors bought a
third more Canadian securities in August over July, raising their net purchases
to C$12.743 bln (from C$9.1 bln in July).  Foreign investors showed a
strong preference for Canadian bonds; scooping up C$9 bln, mostly in the
secondary market.  Corporate bonds, which include government business
enterprise bonds accounted for two-thirds foreign purchases.  About C$1.7
bln of provincial debt was bought.  These were mostly new issues
denominated in foreign currencies.  

Foreign investors have C$2.6 bln of Canadian
equities in August, which represents a slight increase from July. 
is the 12th consecutive month that non-residents bought Canadian shares. 
Canada’s equities sold off sharply from April 2015 through January 2016 and then rallied 30% off the January lows
through the mid-August high.  However, for the past two months, it has been broadly

Canadian investors slowed their purchases of
foreign assets to C$1.6 bln in August from C$4.6 bln in July. 
were buyers of foreign equities (C$3.3 bln), but sellers of foreign debt( C$1.7
bln).  In the foreign debt space, however, their activity was
nuanced.  Canadians sold C$2.3 bln of non-US bonds.  It was the fourth consecutive month of such
divestment, during which time they sold C$7.6 bln of non-US bonds.

Canada’s free-trade agreement with the EU is
in jeopardy.
  Negotiations began in 2009 and concluded in August
2014.  The EU ratification process requires unanimity.  The immediate
challenge is a region in Belgium (Wallonia), where the local parliament voted
against the agreement (Comprehensive
Economic and Trade Agreement–CETA).  EU trade ministers are to meet
tomorrow to discuss how to move forward.  The EU has already agreed that
parts of  CETA can be implemented
before all the members approve it.  

The objections
ostensibly about the scope of liberalization and the establishment
of courts to settle disputes. 
However, the larger issue is that CETA is seen as
model and dress rehearsal for the even more controversial trade agreement with
the US (TTIP).  Opposition to CETA is not limited to Belgium.  Press
reports, for example, suggest that the French government had used various
parliamentary maneuvers to get around opposition in Parliament.   The overall challenge in reaching a trade
agreement, the lengthy negotiations, and
intricate ratification process may also be suggestive of what to expect with the

The US dollar has edged higher against the
Canadian dollar in each of the months in Q3
.  It has extended the
advance through the first half of October, though barely (0.12%).  Last
Thursday, after briefly poking through CAD1.33, the US dollar posted a reversal
pattern and closed below the previous day’s lows.  There was follow
through US dollar selling ahead of the weekend, perhaps encouraged by the
disappointing retail sales report.  Before the weekend the US dollar
approached CAD1.31 and bounced to almost most CAD1.3185 late in the Asian
session before consolidating in Europe and the US between CAD1.3120 and

We see the Canadian dollar as being more sensitive
to the short-term interest rate differential with the US than oil prices
  The two-year differential has widened from a five bp premium in early-July to almost 27 bp
three months later.  It has since pulled back and is near 21 bp today, the
lowest since September 22. 


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