Key Highlights of this week’s article entitled: “Flying Too Close to the Sun”
The Canadian dollar has passed parity with the USD and should maintain its current level throughout the year. Factors preventing future strength in the CAD are 1) investors recent memory of the 2007 climb and subsequent reversal, 2) the drag that a high CAD has on its economy, 3) "priced in" events such as rate tightening and more stable oil prices, and 4) global fund flows cannot have too much weight in small markets.
Key Numbers to watch this week:
· Canada – Real GDP - February (Friday, 8:30AM) – All told, February's GDP report could show a mixed picture with strength in some industries cancelling out underperforming ones, resulting in a soft 0.2% monthly advance.
· US – Real GDP – Advance (Friday, 8:30AM) – After a strong Q4 (5.6%), real GDP growth should likely slow down to a 3% annualized paced for Q1. The pace of recovery should slow down significantly in the 2nd half of the year and into 2011. The Fed is in no hurry to raise rates anytime soon.
· Q1 earnings on the TSX are expected to show the strongest year-over-year growth in 7 years. Financials and materials will account for 3/4 of the increase in dollar terms, and 9 out of 10 sectors will show an increase in earnings.
· A higher Yuan may not hurt resource prices as recent history, from 2005 to 2008, shows that prices remained stable during a Yuan appreciation.
· Analysts earnings expectations for the TSX may be on the conservative side and may signal upside surprises as we head into announcements.
· BoC rate hikes are likely to be gradual as the output gap is approximately 2%. This suggests a gradual increase in rates of approx. 25 bps, starting in June. We may see a pause around December as the high CAD could help keep growth under control.
· As the UK elections creep up, the Sterling seems to be stabilized as investors wait to see the outcome of the election, and the candidates planned responses to the economic malaise.
· While Brazil left its rate unchanged in its March meeting, it is looking increasingly likely that they will hike rates soon to counter inflation.