By Julian Beltrame, The Canadian Press

OTTAWA – The Canadian dollar plunged to its lowest level in eight months before recovering Tuesday, sending a clear signal that Europe’s debt crisis has the potential to reach across the Atlantic and impact Canada’s mending economy.

The loonie has lost about eight per cent of its value over the last month in reaction to fears in global equity and financial markets about the lasting imprint of government debt, and now a new risk — the threat of war on the Korean peninsula.

Over the weekend, the Bank of Spain had to bail out Cajasur — the second savings bank in that country to receive public money since March 2009. On Monday, four other Spanish savings banks announced plans to merge amid concerns over solvency in the sector.

Tension in Asia has also risen since last week after North Korea was accused of the sinking in March of a South Korean warship. Seoul has called for sanctions against the North.

The Canadian dollar closed down 0.94 of a cent at 93.46 cents US on Tuesday after bouncing off a low of 92.18 cents US earlier in the day.

The loonie is not alone in seeing its value eroded. Other commodity currencies have also taken a hit in the flight to dependable and liquid U.S. Treasury bills.

The short-term impact on the Canadian economy of frightened financial markets and a loonie closer to 90 cents than parity, ironically, may be mostly positive.

A weaker dollar will give a much-needed boost to manufacturers and exporters who prosper whenever they can sell their products abroad with a currency discount.

And the unsettling of financial markets has caused real interest rates to soften for mortgages and other loans. Many Canadian banks have dropped posted rates on five-year mortgages to below six per cent.

As a result, prospects that Bank of Canada governor Mark Carney will start hiking rates next Tuesday have gone from a virtual sure thing a month ago to a coin-flip today.

Export Development Canada’s chief economist, Peter Hall, welcomed the fact that the loonie’s wings have been clipped, saying that a dollar at par had the potential to take two or three points off economic growth next year — the equivalent of about $30 billion to $45 billion in output.

But the longer term implications may be that Canada’s recovery won’t go as smoothly as many had hoped. The loonie is acting as a proxy for the global economy: when the Canadian dollar is down, it means so are prospects for global expansion, say economists.

“Everything and anything that happens in the world affects Canada,” said TD Bank chief economist Don Drummond, noting Canada’s dependence on trade and on the prices of commodities it sells to the rest of the world.

The longer term outlook is that many governments, not just the poor cousins of Europe, will soon need to deal with debt burdens that cannot be sustained, and the ensuing clampdown on spending will stall the recovery.

Several economists, including David Rosenberg of Gluskin and Sheff, said the risk of a second downturn in key economies, including the United States as Washington withdraws stimulus spending, has become very real. Much like in 2008-09, Canada would become collateral damage, they said.

“For a small, open (and) commodity-sensitive economy whose entire recession in 2009 was imported from abroad and south of the border, the answer is yes,” Rosenberg said when asked whether a second dip is possible.

That still remains a minority view, although the TD’s Drummond puts the risk at about 20 per cent.

The key question is whether the European crisis is an overblown temporary crisis, or the precursor of government debt woes in the United Kingdom, the United States and other larger economies.

Scotiabank portfolio manager Andrew Pyle said he believes the fears over Europe will blow over in a matter of weeks, which will cause both oil prices and the loonie to recover to previous levels.

“I think people will be surprised to see how quickly that will happen. I wouldn’t be surprised to see us back to parity in July,” he said.

But it’s the longer-term prospects that most worries Drummond. He says the perception that the situation will stabilize if the bailout of Greece and other countries works, or that things will implode if the bailout doesn’t work, is simplistic.

“Those countries (with large debts) aren’t getting out of this any time soon . . . easy bailout or not,” he said.

http://ca.news.finance.yahoo.com/s/25052010/2/biz-finance-loonie-s-plunge-signals-long-term-risk-canadian.html

Emily Mathieu Business Reporter Toronto Star

Higher than expected rates of inflation and reports of record breaking retail sales means interest rate hikes will likely go ahead, according to a top economist with BMO Capital Markets. But domestic strength might not be enough to justify increases if the upheaval in global markets continues, said Porter.

“If the (Bank of Canada’s) decision was based solely on domestic factors, then this would be no questions asked, no debate,” said Doug Porter, deputy chief economist.

The central bank has long predicted rates would rise on June 1, but Porter said doubt over the future of global economic stability could cause them to go off course.

“It would take a very brave central bank indeed, I think, to raise interest rates in the face of the turmoil we are seeing in global financial markets right now.”

According to Statistics Canada’s Consumer Price Index, the core index advanced 1.9 per cent during the 12 months leading up to April, following a 1.7 per cent increase in March.

The boost in April was due mainly to a rise in prices for the purchase of passenger vehicles, passenger vehicle insurance premiums, property taxes, and food purchased from restaurants, the report showed.

The seasonally adjusted monthly core index rose 0.2 per cent in April, following a 0.3 per cent decline in March.

Consumer prices across the country rose 1.8 per cent in the 12 months leading up to April, following a 1.4 per cent increase in March. In Ontario, prices rose 2.2 per cent.

Porter said BMO has no plans to alter their position that rates will rise on June 1, but said that position could change if market upheaval continues into next week.

“If Canada were an island there would be no debate,” said Porter. “There is a very compelling domestic case for higher interest rates.”

Statistics Canada reported a 2.1 per cent increase in retail sales dollars in March, to $37 billion. Porter said earlier reports had predicted sales would be close to flat. “Instead we get one of the best gains on record.”

National energy prices rose 9.8 per cent between April and the same time the previous year, following a 5.8 per cent increase during the 12 months between March 2010 and the same time the previous year. Excluding the increase in energy the index rose 1.1 per cent, compared with a 1 per cent increase in March.

For the sixth month in a row, gas prices exerted the strongest upward pressure on the index. In April, Canadians paid 16.3 per cent more at the pump than they did the same time the previous year. That change follows a 17.2 per cent increase between March of this year and the same time in 2009.

Natural gas prices were up 3.3 per cent in April than the same time the previous year. Between March 2010 and the same time the previous year prices had dropped 22.4 per cent.

The cost of transportation was up 6.2 per cent in the 12 months to April and consumers paid a 5.6 per cent more for insurance premiums in April compared to the previous year.

Housing costs were up 0.8 per cent, after declining 0.7 per cent in March, with household utilities exerting the most upward pressure. The mortgage cost index fell 6.1 per cent, the report showed.

Food prices were up 1 per cent, following a 1.3 per cent increase in March. The 1 per cent rise, largely related to prices for food purchased in restaurants, was the smallest since March 2008.

Health care prices rose 3.3 per cent, the report showed. http://www.thestar.com/business/article/812567–rate-hike-not-guaranteed

By Claire Sibonney Reuters   The negative news has led many to question whether Bank of Canada will start raising rates from their current record lows on June 1.

Yields on overnight index swaps, which trade based on expectations for the Bank of Canada’s key policy rate, have fallen in recent weeks and on Wednesday indicated just a 51 percent chance of a June 1 rate increase.

On April 20, when the bank removed its conditional pledge to keep interest rates on hold until the end of June, the market priced in more than a 90 percent likelihood.

Currencies tend to strengthen as interest rates rise as higher rates often attract capital flows.

“Even with the ongoing uncertainty, the Canadian situation warrants a small move toward more normal rates so I wouldn’t unwind the forecast just yet,” said Craig Wright, chief economist at Royal Bank of Canada., whose bank was the last primary dealer to join the call for a June 1 move.

“We’re really just looking at a 25 basis point adjustment … tapping of the brakes rather than slamming them on.”

Globe and Mail Wednesday, May 12, 2010

Andrew Willis

Bond traders are still expecting the Bank of Canada to raise short term interest rates on June 1, but the move is no longer the sure bet it was a few short weeks ago.

Credit markets are currently putting a 84 per cent probability on a 25 basis point hike in overnight rates after the central bank meeting in June, according to a report that TD Waterhouse published late Tuesday on BAX sentiment, a reflection of what the futures market is predicting. BAX sentiment put a 100 per cent probability on a hike prior to the most recent Greek credit crisis, and European financial bailout.

BAX sentiment puts a 94 per cent probability on another 25 basis point rise in rates at the July 20 Bank of Canada meeting

Tavia Grant Globe and Mail Update

 Troubles in southern Europe are hitting home for many of the 2.4 million Canadians with origins in Greece, Portugal, Italy and Spain.

Euro woes have rocked global stock markets and wreaked havoc with currencies. At the macro level, economists say the region’s fiscal crisis now represents the biggest risk to the global recovery.

But the turmoil is trickling into the micro level, too. From local food importers who are seeing distribution interrupted as Greek suppliers fold, to Italian-Canadians, whose homeland pensions have dwindled with euro weakness, many are watching the crisis with growing consternation.

And they loathe the PIGS acronym.

Alexander Georgiadis imports goods such as olives, feta, baklava and balsamic vinegar as president of Krinos Foods Canada Ltd., the country’s largest importer and distributor of Greek specialty foods.

He has been hit hard by the fiscal crisis on a number of fronts. A string of general strikes in Greece have disturbed shipments. A port dispute also upset distribution. Some of his small-scale, family-owned suppliers have folded. He was able to find other suppliers for some products, such as olives and peppers. But he hasn’t found any replacement for his now-bankrupt supplier of canned anchovies.

Wild swings in the exchange rates are causing worse headaches. Theoretically, importers like Mr. Georgiadis should benefit from the euro’s 15-per-cent slide against the Canadian dollar in the past half year. In reality, it has made business planning chaotic because prices and costs change between when a deal is signed, and when the goods arrive. “The volatility of the currency is the biggest problem we’re facing – trying to guess every time when you should make a payment .”

He’s fielding calls from worried friends in Canada, asking whether they should move their savings out of banks in Greece in case their accounts are frozen. He thinks their money is likely safe – but many people are moving money out of the country anyway.

Then there is the personal worry. “I’m very preoccupied,” says the Toronto-based business man. “It’s not going to be easy to do all the changes that are necessary. There is a big danger of social unrest, and that’s what people are afraid of.”

Canadian officials are also fretting. Bank of Canada Governor Mark Carney said last week that the problems could hamper the Canadian recovery, while Toronto-Dominion Bank said the Greek fiscal crisis “represents the largest single risk to the global economic recovery.”

A host of concerns are rippling through Canada’s Greek community, said Crist Geronikolos, president of the Canadian Hellenic Congress and the Greek Community of Toronto.

Many people have investments in the Greek stock market, which has tumbled 31 per cent in the past six months. Others with property in their home country are bracing for tax hikes. Talk is starting to percolate about immigration – how, if things worsen, more people will want to leave the country.

Then there’s the added insult of the PIGS (Portugal, Italy, Greece, Spain) acronym, which he says compounds a negative perception of Greece. “It is irritating people. You know what? That gives a really bad connotation. There’s a lot of other countries around the world with a much larger deficit, but with the ability to print money. Greece doesn’t. It’s an unfair portrayal,” Mr. Geronikolos said.

Sharing entrepreneurial know-how may be the best way for the ex-pat community to help Greece, said Werner Antweiler, who specializes in trade at University of British Columbia’s Sauder School of Business. “The Greek expatriate community in Canada can contribute to Greece’s recovery by fostering entrepreneurship in Greece, as many immigrants from Greece have become successful business people here in Canada. It’s that kind of entrepreneurial spirit that will move things forward in Greece, along with the necessary policy corrections.”

Some Italian-Canadians are also feeling the effects. The euro’s dive means pensions from Italy and elsewhere are worth much less than a year ago, said Angelo Persichilli, columnist at Italian-language newspaper Corriere Canadese. “They are very concerned,” he said. “Now that the euro has lost 15 per cent, for pensioners it’s a huge loss. We are talking about millions of dollars in losses to vulnerable people who are on a fixed income.”

His newspaper, too, has been hit. Italy’s government, which finances many overseas Italian papers, is proposing to slice the Toronto-based paper’s budget in half as part of its austerity measures.

It has also become tougher to drum up interest in investing in Italy, said Corrado Paina, executive director of the Italian Chamber of Commerce of Ontario. “Canadian investors in this moment aren’t too eager to invest in Italy.” Conversely, he’s seeing more Italian companies that want to boost their presence in Canada because of its relative economic stability.

There are some positive offshoots, however. For many who regularly return to their homelands, the strength of the Canadian dollar is making those visits much cheaper this year. And a falling euro is generally advantageous to Canadian importers.

Brito Fialho, president of the Federation of Portuguese Canadian Business and Professionals, said most members of his organization haven’t yet felt a negative impact. But some people with investments in Portuguese banks are “a little apprehensive.”

Mr. Geronikolos is also apprehensive about his homeland. “We look at this little country … and it hurts to see what’s happening,” he said. Still, the hope is Greece will emerge “after being a little bruised and battered, stronger and better for the experience.” http://www.theglobeandmail.com/report-on-business/europes-economic-woes-hitting-home-in-canada/article1555476