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Federal Budget Provides For Large Stimulus, USD/CAD Forms Short Term Base‏, Hawkish Comments From FOMC Members Increases Probability Of Fed Rate Hike In April


The Federal Budget for fiscal year 2016-17 revealed a $29.4 billion deficit and for the next fiscal year is expected to be at $29 billion and falling to $14.3 billion in the fifth year of the Liberal Government. In absolute terms the deficit does look large, but if compared as a percentage of Government revenues it is not alarming. In fiscal year 2016-17, with Government revenues estimated at $287.7 billion, the deficit is at 10.24% of these revenues. In historical terms as per data from the Department of Finance, as recently as 2011-12 it was higher at 10.76% and during the financial crisis it peaked at 22.39% in 2009-10. Historically, the highest it has ever been since 1966-67 from where data is available is 44.10% in 1984-85!! Overall Federal debt is expected to go higher to $732.5 at the end of the fifth year from $619.3 at the end of 2015-16, an increase of $113.2 billion during this five-year period. In terms of Federal Debt as a percentage of GDP it is projected to fall to 30.9% from 31.2% currently. This number also seems conservative if compared to similar numbers from other G-7 countries and is one of the lowest, barring Germany. GDP growth for fiscal 2016-17 has been lowered to 1.4% down from the fall forecast of 2.0%. For the subsequent years it is pegged at 2.2-1.9%.

Excluding interest payments outgoes, Federal spending is expected to be higher by 7.6% at $291.4 billion and this excess spending could go a long way in kick starting growth or at least mitigating some of the slow down we are witnessing in the Canadian economy. This dose of Keynesian economics, when the economy does have the ability to borrow and spend in a low rate environment could be a better alternative than the experiment with negative rates which have not resulted any dividends in the Europe. Fiscal austerity has actually compressed growth in the Eurozone and not really achieved its objective of reducing debt as the slowdown in the economy has further compressed tax revenues and increased debt as a percentage of GDP with GDP stagnating or falling.

The Canadian Dollar seemed to reverse trend this week in the midst of a strong US Dollar, lower crude oil prices and the higher budget deficit. The Canadian Dollar has formed a short term bottom at 1.2919 this week and we could see further weakness in the Canadian Dollar in the coming weeks. The low traded of 1.2919 is quite close to the 1.2976, which is the 61.8% retracement of the move from 1.1916 in May last year to 1.4691 in January this year. Importers in Canada could take advantage of the USD/CAD trading around the 1.3200 levels to lock in hedges for US Dollar payments due for the rest of 2016. The market is now focused on Bank of Canada's monetary policy meeting scheduled on April 13. The large quantum of fiscal stimulus delivered by the Federal Budget could mean that Bank of Canada (BoC) could wait to evaluate the impact of this on the economy for the next quarter or two and deliver a cut in rates around fall or later if required. Canadian equities were under pressure this week with weak gold, crude oil & other metal prices.


A large portion of investors in UAE equities are investors who hold stocks for their dividend yield, given the high dividend yield & also explains in the low amount of floating stock in such high dividend yielding stocks. It is not uncommon for investors to seek higher dividend payouts during AGM's and managements yielding to such demands & increasing dividend payouts. There was a similar incident in UAE this last week as the largest bank by assets National Bank of Abu Dhabi (NBAD) hiked dividend payout after investors pressured the management for a higher payout. The Bank had announced a dividend payout of Dhs. 0.40 per share ($0.109) and this was increased to Dhs. 0.45 per share ($0.122). Yield on the NBAD stock is now at 4.89% and the P/E ratio is at a more modest 9.40%. The UAE Central Bank in January had asked banks to get dividends approved by the Central Bank before announcing the details of payments to markets and shareholders as per reports. Increasing bad debts & pressure on liquidity has resulted in the UAE Central Bank being cautious with dividend payouts. The pressure on demand for higher dividends was evident in Abu Dhabi also as real-estate giant Aldar announced a new formula for paying out dividends from next year which will be based on the underlying cash performance and this is expected to increase

As per UAE Central Bank data, loans in the banking sector increased by Dhs. 11.80 billion ($3.21 billion) with the loans to the private sector increasing by Dhs. 8.2 billion ($ 2.23 billion). In the first two months of the year loans in the system have increased by Dhs. 18.20 billion ($4.96 billion). Deposits in the system were stagnant and in the first two months it has fallen marginally by Dhs. 0.50 million. Impact of low crude oil prices and consequently plunge in government spending, which is the key factor for deposit accretion is evident in the system currently. The loans to deposit ratio in the system has increased further to 102.22% and the tighter liquidity is feeding through higher rates in the system. Interbank Eibor rates have steadily increased over the last year with the one year Eibor rate increasing to 1.57% from 1.02% at the beginning of 2015.


In India, Forex Reserves increased by $2.5 billion for the week ending March 18 to hit a new all-time high of $355.90 billion, surpassing the previous high of $355.4 billion on June 27 last year. This is quite astounding as most emerging markets like China, Brazil, Russia & others have witnessed significant drop in foreign exchange reserves with large outflows from debt, equity and other markets. The Indian economy is expected to post strong GDP growth in the current year and in the next few years and this is in contrast to most of the other emerging markets which are expected to contract or post significantly slower growth.

There were only three trading days in India due to holidays on account of festivals. Equities markets posted modest gains and closed higher for the fourth consecutive week. The market is expecting a cut in interest rates from the Reserve Bank of India (RBI) after lower inflation readings and a cut in the Provident Fund rates by the Federal Government. Foreign Institutional Investors bought equities worth $675.84 in three trading days this week, reflecting the bullish sentiment amongst global investors in Indian markets.

The Indian Rupee traded in a rather narrow range in the three trading days as foreign investor flows cushioned the demand for US Dollars and the strength of the US Dollar in international markets. There was also selling by exporters in the forward market with one year forward premium falling lower to by about 5 paise.


The Chinese Yuan weakened the most since January this year with the onshore CNY falling by 0.69% due to weaker mid-rate fixings by the central bank, PBoC. The tightly controlled Yuan has strengthened significantly after falling sharply in January in a move to stabilize the currency. The freely traded offshore CNH currency fell just under 1% which is the biggest weekly fall since, the volatile days in January this year. While China did achieve its objective of having its currency in the SDR basket late last year, the flip side it is that it is facing demands of more transparency on its rather opaque currency intervention and details of holdings of forwards and futures contracts which are used in the intervention process. The Yuan will officially be part of the IMF basket on October 1 this year. There is some amount of speculation that the policy makers in China will reduce the quantum of intervention and this could lead of weakness in the Yuan.

In US, economic data was slightly weaker than expected, existing home sales fell sharply in February by 7.1% to an annualized pace of 5.080 million. Prices were also soft with the median price falling to $210,800 which is the lowest number since February last year. After weak housing permits data last week, this data will raise the question whether the housing sector which has boosted by strong jobs growth is finally slowing down or this is just a month or two of short term weakness. New Home Sales were in line with expectations at 512k, this number is quite volatile due to the same sample size used in this survey. Durable goods orders was weaker than expected with downward revisions for the previous month also. Core Capital goods orders were down 1.8% indicating continued weakness in capital investments in the US economy, contributing factors include the strong US Dollar and also weak commodity prices. The third and final estimate for Q4 GDP came in stronger than expected at 1.4%, the second estimate of Q4 GDP had pegged it at 1% & the first estimate had pegged 14 GDP growth at 0.7%. The major chunk of this upward revision emanated from upward revision to consumer spending, which accounts for about two thirds of US GDP, increasing to 2.4% from 2.0% reported in the second estimate. Higher consumer spending which is really the growth engine for the US economy, means that possibilities of a recession recede. The prime reason for higher spending has been a strong job market and low gasoline prices. The other positive from the third estimate was that inventory accumulation was revised slightly lower to $78.3 billion from $81.7 billion. This high level of inventory will still certainly be a drag on Q1 GDP which is expected to around 1.4%. There was one negative for the stock markets in the GDP report with corporate profits contracting for the second consecutive quarter as the strong US Dollar impacted earnings for corporations who large overseas operations.

The reason for the strong US Dollar this week was largely due to hawkish comments by FOMC officials which increased probability of a rate hike in April. FOMC voting member James Bullard stated that both unemployment and inflation could exceed the FOMC's targets and this could put the FOMC behind the curve, requiring a faster pace of rate hikes later if rates are not moved higher now. Non-voting member for 2016. Richmond Fed President Jeffery Lacker was hawkish in his comments stating that the Fed could hike interest rates as early as next month and he expects continued improvement in the job market & inflation will hit the Fed's 2% target in the medium-term. Atlanta Fed President Dennis Lockhart who is also a non-voting member this year was also hawkish in his comments "In my opinion, there is sufficient momentum evidenced by the economic data to justify a further step at one of the coming meetings, possibly as early as the meeting scheduled for end of April." Chicago Fed President Charles Evans who is a non-voting member and considered to be one of the most dovish members, was also supportive of two more rate hikes this year given that fundamentals for the economy are good. Philadelphia Fed Patrick Harker who is not a voting member this year was one of members with the most hawkish comments stating "There is a strong case that we need to continue to raise rates" & "I think we need to get on with it." These Hawkish comments by FOMC members are quite in contrast with the dovish FOMC statement on March 16. This could be the start of a phase where the FOMC is more divided and opinions among Hawks & Doves get harder, which means that decisions by consensus could be difficult in the coming months.

Hawkish comments sent gold prices plummeting sharply lower by about $31 an ounce. With the probability of US rate hikes increasing, gold which has been one of the best performing assets of 2016 lost allure with investors.

Researched & Compiled by: Shailesh N. Mulki, Member of the Toronto Chapter of ICAI

Disclaimer: This is not a research report and the views and information contained herein are the personal views of the author. These should not be taken to constitute advice or recommendation.