Markets have been under pressure this week. As of this writing, the Dow is down 1.6% to 13,132, and WTI crude is trading under 87 per barrel. This does not mean that the markets will not reverse, but the bearish catalyst has been disappointing earnings. So with the back drop of falling equity and commodity prices, the Bank of Canada released its assessment of the world and Canada.
It concedes Chinese growth is slowing and Europe is in a recession, but the U.S. economy is staging a gradual recovery. It states:
Notwithstanding the slowdown in global economic activity, prices for oil and other commodities produced in Canada have, on average, increased in recent months. Global financial conditions have improved, supported by aggressive policy actions of major central banks, but sentiment remains fragile.
In Canada, while global headwinds continue to restrain economic activity, domestic factors are supporting a moderate expansion. Following the recent period of below-potential growth, the economy is expected to pick up and return to full capacity by the end of 2013. (my highlight) The Bank continues to project that the expansion will be driven mainly by growth in consumption and business investment...
The Bank will monitor business activity going forward. Should this rosy outlook materialize, it may lead to a reduction of stimulus, and a higher bank rate. But is this optimism justified?
One of the assumptions of Canadian GDP growth of better than 2% is the continuation of foreign investment in the energy patch. This past weekend, a pending C$5.9B acquisition of Progress Energy Resources Corp. (PRQNF.PK) by the Malaysian oil giant Petronas was blocked by the Canadian government. No details were given as to why the purchase was blocked.
Pending is a bid by the Chinese Oil Company CNOOC (CEO) for the takeover of Nexen Inc. (NXY). This bid is for C$15.1B. There are rumors that the Canadian government is negotiating for access to Chinese markets for Canadian financial companies. How this will be resolved is unknown, but the barriers caused by the government requiring that acquisitions are for the good of Canada will slow the whole process.
One of the features of the Canadian Dollar (USDCAD), (FXC) market that we have been closely following is the size of the speculator position in the futures markets. The high in the C$ spec long was 139.3K contracts in the September 18 report. This position size has gone down, but is still a massive 121.3K contracts.
The USD has been gaining on the C$, breaking through the resistance at .9880. The 200 day SMA is a bit shy of the 100 handle. Note the MACD is turning higher. This is an interesting set up. Should the bulls capture the trade at parity, above the 200 day SMA, this might propel the pair to slightly above the 1.02 area.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.