Wednesday, January 21, 2015

Bad Bad news for Canada -- Surprise rate drop to 0.75%

Well that's a shocker, the Bank of Canada just decided to cut interest rates by 0.25% to 0.75% -- until recently, the BoC was talking of rate hikes.  Needless to say that the CAD took a bath this morning, its down to 0.80c to the USD.

The issue is that oil is a massive component of Canada GDP, inflation is about to get crushed into negative territory and Canada's housing bubble is about to hit home in a most unpleasant fashion.  Talking to banker friends they are very concerned, 14,000 jobs were lost last week, mostly in the oil patch, mostly high paying jobs, and mostly with guys who will be unable to recycle their skills (at the same salary).  Alberta, Saskatchewan and Vancouver are about to get hit with difficult housing markets.  On top of all that fun, the crackdown on Chinese fraud may hit the Canadian housing market -- Canada was/is a favorite destination for mainland Chinese looking for a bolthole -- demand for these high priced properties may be coming to a screeching halt (maybe temporary maybe permanent).  At any rate the BoC was spooked.

Lowering rates will hit the CAD big time, already its lost 3c over the past 72 hours (the trend is almost certain to accelerate).  On the other hand this whole dance began when the Swiss cut loose their peg to the Euro.  In the past few days we had:

Swiss giving up on the Euro
ECB monetising Euro50 bn per month of debt
BoC cutting rates by 0.25%

What's next?

My guess is the Feds will stand steady -- the USD is strong because the economy is doing well (GDP growth was massive in Q3 & Q4 2014)

ECB will look at its inflation numbers, but with a weakening Euro (its dropped from 1.25 to 1.16 over the past few months), Europe will be importing inflation (excluding oil) so they may feel OK not to cut rates yet

Japan doesn't matter

The Oil and Gas sector is about to get hit, first Canada, then the US.  First will be default on high yield bonds.  After that jobs are going to start to go, and production will fall, that should lead to an increase in oil prices.

If that's the Saudi's solution to competition, I find it hard to understand, because as soon as oil prices climb back up to $75/80 drilling in the Bakken will start again, oil sand production in Canada will resume.

Anyway, the fall out has begun, its not clear where this will end, but the short end pressures are adding up:  Canada is certainly feeling the pressures, Q1 results for banks (end of January) may see some fall out already -- although it may be too early

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