Banks Tipping Over?

TECHNICAL SCOOP - CHART OF THE WEEK

Charts and commentary by David Chapman / GoldSeek.com

Charts created using Omega TradeStation 2000i.  Chart data supplied by Dial Data

The central banks of the world continue to shock markets. “Shock” was a word used to describe the completely unexpected rate cut by the Bank of Canada (BofC) on Wednesday January 21, 2014. It was not quite in the same league as the shock delivered by the Swiss National Bank (SNB) the previous week when they unexpectedly released the Swiss Franc from its peg with the Euro. There were some similar if opposite effects. The Swiss Franc soared that day while the Cdn$ “tanked” losing 2% against the US$ on the day.

The Cdn$ is down 3% so far on the week and 6% so far in 2015. Trading desks that were caught with too many Cdn$ suffered immediate losses. Apparently, there were margin calls against some firms. That was not unlike what happened with the Swiss Franc although there was no word of any firms going under as a result of the BofC’s surprise move.

On Thursday January 22, 2015 the European Central Bank (ECB) came in with its own version of “shock and awe” when they announced a quantitative easing (QE) program of €60 billion a month until September 2016. That was above the expected € 50 billion. At current exchange rates (that changes every day as the Euro sinks) that is just under US$75 billion/month although some say it is equivalent to the US’s QE3 of $85 billion/month.  The impact on the Euro was immediate as the Euro fell another 2.0%. Stock markets were delighted as stock markets in the US, Europe and Canada all rallied on the news. All the stock markets seem to believe that the punchbowl should continue.

Shock and awe is hardly a term one should be using when referring to the central banks of the world. One is supposed to think of confidence, prudence and sound money management. Take the BofC as an example. Its purpose and role is “to promote the economic and financial welfare of Canada”. The BofC has four main areas of responsibility (which is the same with all central banks) – monetary policy, financial system, currency, and funds management.

Cutting interest rates on one hand while worrying and warning about sharply rising household debt (now 163% of household income) and once again fretting about Canada’s overvalued housing market (by 30% according to some analysts) does not exactly engender confidence. Watching the currency collapse to multi-year lows does not engender confidence in the currency or the country. The interest rate shock came on top of the oil price decline shock although if you just drive as most of us do the oil price decline is a boon. The interest rate cut was designed, according to the BofC to offset the decline in oil prices to some extent and the oil price decline impact on debt-to-disposable income and jobs. The market ignores the overvalued housing market and high debt to income ratio at their peril.

The expectation is that lower interest rates will set off a boom in investment by corporations and spur consumer demand by consumers borrowing more. Canada, like all western countries has had low interest rates for years and it has failed to set off a major investment boom nor has it sparked a sharp rise in consumer spending. The exception may be in housing where low interest rates have encouraged people to assume large mortgages and buy up helping to push home prices into the stratosphere particularly in major cities such as Toronto and Vancouver. Yet it was sharply rising housing prices financed with cheap money that helped trigger the financial collapse of 2008.

Yes exporters should benefit from a lower Cdn$ and exports make up roughly 30% of GDP but Canada’s prime export has been oil and given the collapse in oil prices pumping out more oil is not likely. On the other hand the lower Cdn$ makes imports more expensive and most consumer goods and even a number of foods are imported. That could raise the price of food and clothing amongst others.

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