Oh Canada
We've touched quite a bit on the US NFP so we'll move north of the border today. For a review of our latest NFP expectations please revisit last week's post titled "Turkey".
Just a reminder that the Bank of Canada is also a member of the bottom-rate setting club. At 0.25% their cash rates might be double the Fed's but it is still ultra-low policy and yet the Loonie has been on a tear ever since March/April when risk took off again. That last statement goes to show how important watching sentiment is but for today we'll focus on the economics as if the BoC doesn't get moving fairly soon you'll have to wonder if Parity is a real call in USDCAD.
Below is Canada's Current A/C. You can plainly see that they have quickly moved into a deficit as Export orders have tumbled over the past year. This will be a good indicator to watch when trying to forecast the BoC, but it is not the indicator to use for USDCAD.
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The chart below left shows that the BoC doesn't seem to be concerned about inflation right now. They seem to understand how CPI lags much better than a few other central banks (the BOE for example). Per the data the core levels apparently have not changed all that much over the years. At the headline level CPI is back into inflation territory after dipping into deflation territory for 4 consecutive months.
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On a rolling 3/mo basis Canada is back producing jobs. The unemployment rate obviously lags but for now the Employment situation has stabilized. The chart on the right shows that inflation tends to follow jobs and it is fairly ease to assume that the BoC will be focused on this correlation. If 2010 turns into a job creation year for Canada then don't expect 0.25% rates for too much longer.
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Of course in the end consumption and increased demand (or population growth) are the variables that cause inflation. Not just higher energy prices as we've touched on previously. We roll back the chart below to 2001 to show that consumption really never took a hit in Canada during the 2001 recession. Obviously consumers cut back this year and the inflation rate tends to follow. The chart shows that consumption is already on the road to recovery in Canada therefore will inflation be far behind?
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Friday also awaits the Ivey PMI. I think it is a good forecasting tool as often times readings will be 60+ or sub 50. Not 52, 53, 52.3. There is a statement in the Ivey PMI and stocks tend to follow its lead as well.
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The Bank of Canada meets on Dec. 8th and will not be changing rates as in October they stated a conditional commitment to keep rates at 0.25% until the end of Q1 2010. The latest disappointing GDP report will help confirm this outlook. That said they did expect that growth would be more reliant on internal consumption (which is occurring) than exports. Therefore the key take away next week may be any shift in their conditional policy. If employment starts to follow the Ivey PMI and increase at quicker levels than the market expects then inflation will not be far behind.
Final note, using the Ivey PMI as a sentiment indicator would have provided you direction for the risk-on trade back in March/April. The other indicators probably would not have.
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