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Loonie Strengthens On Crude Rally & Inflation In US Spikes Higher‏


The Canadian Dollar firmed up substantially this week as market participants betted that the plunge in crude oil prices could abate. The rally in crude oil prices after comments from Russia about the OPEC & non-OPEC producers in March also boosted the Canadian Dollar. Two of the top Canadian banks have called a short term top in the Canadian Dollar with analysts from CIBC stating that worst of the depreciation could be behind us even if it has one slight dip ahead. Analysts from Scotia had called a top on the Canadian Dollar earlier in Feb. Canadian Dollar short positions in the futures market at CFTC fell by 8.2k contracts to 36.9k which is the lowest it has been since November 20 last year.

Quarterly results from banks were mixed this week with CIBC, BMO & National Bank of Canada reporting better than expected profits, but the second largest bank by assets RBC reported flat earnings. The stress from the oil & gas sector was visible in RBC's results as impaired loans in the sector doubled to C$ 310 million as compared to the last quarter. CIBC also reported quarterly profits that beat expectations and raised its quarterly dividend. Growth in its retail and business banking segments helped offset losses from the oil-sector. TD Bank reported first quarter earnings that were slightly below analysts' expectations. In the case of TD retail earnings in Canada and also the weaker Canadian Dollar boosted US retail business earnings, which offset some of the softness in the oil sector and capital markets business. Both CIBC & TD also reported higher provisions for impaired loans in the oil & gas sector.

As per data from Statscan Canadian corporate profits were down 3.1% in Q4 2015 to $77.4 billion. The financial sector accounted for a bulk of this decline & the beleaguered oil & gas sector reported a loss of $1.6 billion which was higher than for any of the previous four quarters. The decline in profits in the financial sector was due to fair value adjustments to actuarial liabilities among life, health and medical insurance companies.

Ontario released the annual budget this week with expenditure pegged at $133.9 billion which is up 1.3% over the interim estimate for the current fiscal year at $132 billion. In real terms the expenditure is marginally down give the fact that inflation is trending around 2%. The fiscal deficit is expected to be at $4.3 billion for the fiscal year 2016-17 and for the current year it is estimated at $5.7 billion. Ontario's debt which is estimated at $296 billion is expected to increase to $308 billion in 2016-17 & this is the largest debt for a non-national entity globally. Interest expenses at these low levels for the current fiscal year is at fourth largest item of expenditure just below Community & Social Service and is expected to move higher to the 3rd largest item of expenditure in 2016-17.


As per data from the UAE Central Bank; deposits in the banking system fell by Dhs. 0.5 billion in January, whereas lending in the banking system increased by Dhs. 6.04 billion. The Loans to Deposit Ratio for the system as a whole increased to 101.41% pushing further higher beyond the 100% level, signifying that the banking system is facing tight liquidity conditions. In January, provisions for Non-Performing Loans (NPL) increased quite sharply by 11% to Ds. 344.2 billion from Dhs. 308.1 billion in December. This spike in NPL's shows the extent to which the downturn in the UAE economy is impacting at the ground level, with business conditions tightening.

UAE Minister of State for Financial Affairs Obaid Humaid Al Tayer stated that UAE will implement value added tax (VAT) at the rate of 5% starting January 2018. The items that will be exempted are about 100 food items, bicycles, healthcare & education. It is expected that the framework to implement VAT will be agreed upon by the GCC countries in June this year. Member countries will have time from Jan 2018 to Jan 2019 to implement VAT. The lead time is to enable the private sector to set up process to comply with these rules. This is a move to diversify government revenues away from crude oil and UAE expects to raise Dhs. 12 billion from this source in the first year of implementation. The UAE Finance Manager also confirmed that there is no plan to impose personal income tax and there has been no study undertaken to evaluate this no such proposal is under consideration.

Inflation which has been rising, hit the brakes in January as inflation in Dubai fell sharply lower to 1.9% from December's 3.1%. The largest contributor to this fall was the dip in transportation component of the indicator which fell by 4.1%. Petroleum prices which were decontrolled in August last year to reflect global prices have fallen 25% since then. Housing & Utility costs which account for about 44% of the CPI Index fell by 0.46%. Housing & Utility costs have been the key driver for inflation and with this sector slowing down, expect inflationary pressure to ease off in the coming months.


The economic survey released by the finance ministry projected GDP growth between 7.0% and 7.75% for the current fiscal year 2016-17 and around 8% for the following two years. The fiscal deficit for the current fiscal year 2015-16 is expected to be below 3.9%. Inflation at the consumer level is expected to be around 4.5 to 5.0% in the next fiscal year. Currently only about 5.5% of income earners in India pay tax and this is proposed to be widened to 20%. As compared to the overall population eligible to vote only 4% of these actually pay tax!! The survey emphasized the need to increase the tax base. The survey also opened up an important aspect for debate - taxation of high earning farmers. With agricultural income exempt from tax, even the most affluent of farmers pay no tax currently. Chief Economic Advisor, Arvind Subramanian who headed the team that prepared this mentioned that liquidity needs to be injected into the financial system and there is scope for easing monetary policy. It also recommended implantation of GST which will replace multiple levels of taxation at the central, state and local levels, which will create a seamless market at the national level. This important bill has been struck in the upper house (Rajya Sabha) where the current ruling party does not have the required majority.

The Indian Rupee was under pressure throughout the week and traded precariously close to the all-time low of 68.85 traded in August 2013. Rumored RBI intervention through state run banks brought in some supply to the market and cushioned the fall. The Rupee will be under depreciating pressure in the short term given the global risk environment. This also found its way into the Economic Survey where it was mentioned that the Rupee's value must be fair which can be achieved through monetary relaxation and it should avoid strengthening. The survey also mentioned that India needs to prepare itself for a currency adjustment in Asia in wake of a similar adjustment in China. The sentiment in the equity markets in India were also negative giving up gains from the previous week. The railway budget did little to lift the market, but the economic survey added some boost on Friday. Next Monday, the annual budget will be unveiled and this could be a major market mover with expectations of corporate tax rate cut. Foreign Institutional Investors (FII's) were net sellers of $63.27 million this week. In the debt markets the fall in the Rupee seems to have unnerved investors seeking to earn the carry between US Dollar and Indian Rupee debt; resulting in a FII's selling $ 922.87 million worth of Indian Rupee debt.

The Indian Government raised Rs. 5,030 crores ($ 732 million) from the sale of 5% stake in National Thermal Power Corporation of India. The quota allocated for retail investors went undersubscribed, given the negative sentiment in equity markets. The Government had set a target of Rs. 69,500 ($ 10.116 billion) crores for disinvestment for the current fiscal year ending in March 2016. The government has only managed to raised Rs. 18,330 ($ 2.668 billion) till data and the fall in petroleum subsidy due to lower crude oil prices has helped reduce the subsidy bill and made up for this deficit.


Crude Oil prices tumbled lower this week as Iran called the Saudi proposal to freeze production "ridiculous." Iranian Oil Minister Bijan Namdar Zanganeh went on to add that this production cap puts "unrealistic demands" on Iran. Currently Iran is producing about 2.8 million barrels a day, when it was forced to cut production due to sanctions it had a quota of 4.5 million barrels a day within OPEC. In the 1970's Iran was producing about 7 million barrels a day. Saudi Arabia powerful oil Minister Al-Naimi in a conference mentioned that "Inefficient, uneconomic producers will have to get out, that is tough to say, but that's fact." He went on to add that he would prefer if oil didn't continue to trade at $20 level, but that Saudi could live with it & that production cuts would not happen though more countries would be part of the production freeze. On Thursday & Friday, crude oil prices rallied higher after Russian oil minister mentioned that oil ministers from OPEC & non-OPEC producers are planning to meet in March to possibly sign an agreement to freeze production.

In UK as "Brexit" gathers momentum the Sterling Pound crashed to below 1.4000 a level last seen during the financial crisis in 2009. UK is scheduled to hold a referendum in June which will decide whether it stays in the EU or exits the EU, which the market has termed "Brexit." London Mayor Boris Johnson who is one of the most popular politicians; mentioned over the last weekend that he will campaign for the UK to leave the EU.

In US economic data continued to be mixed. Existing Home Sales increased by 0.4% in January from December. Year on Year the pace of growth is at 11% showing underlying strength in the household sector. There is some amount of weakness in prices with the median price falling 4.2% in January as compared to December, but compared to last January price increase is quite robust at 8.2%. New Home Sales for January came in below expectations at 494k, sharply lower than the massive 544k for December. Here again prices were weak with the median price falling 5.7% for the month, with the Year-on-Year number also showing a fall at 4.5%. Durable Goods orders for January were up 4.9%, boosted by the transportation sector, though the core number excluding the volatile transportation sector was also up 3.9%. The second reading of Q4 GDP was unexpectedly revised higher to +1% from 0.7% reported in the initial estimate. The largest factor accounting for this upward revision came from higher inventories which contributed 0.31% to the overall increase & another important contribution came from lower imports which accounted for an increase of 0.25%. GDP was dragged lower due to lower consumption which accounted for -0.11% & government spending which was lower at all three levels of government resulting in lower overall GDP of 0.13%. Overall though the GDP numbers were revised higher, they were not for the right reasons. The higher inventory accumulation in Q4 will drag growth lower in Q1 2016 & lower imports which is due to the strong US Dollar. Inflation jumped sharply higher as the FOMC's favored inflation gauge PCE Price Index increased to 1.3% in Jan from December's 0.6%. This is the highest it has been since sept 2014 and pushes it closer to the Fed's target of 2% and also raised prospects of further interest rate hikes.

Keep an eye out for Gold prices, which in Technical Analysis parlance experienced a "Golden Cross"; which means that the 50-day moving average climbed over the 200-day moving average for the first time in over 2 years. This is a bullish indicator, meaning gold prices could probe further higher levels in the coming months.

Compiled & Researched by: Shailesh N. Mulki

Disclaimer: The views and information contained herein are the personal views of the author. These should not be taken to constitute advice or recommendation.