Toronto Gold Bullion Newsletter Archive - Daily FX report dated 18/01/2011

Bank of Canada Governor Mark Carney left his benchmark interest rate at 1 per cent Tuesday, warning that uncertainty overseas, the strong Canadian dollar and the poor corporate productivity performance will hold back exports even as he upgraded his forecasts for the next two years.

In explaining the decision to leave borrowing costs alone for the third time in a row, as expected by the markets, the Bank of Canada said the global recovery is “proceeding at a somewhat faster pace” than policy makers had anticipated last fall, though “risks remain elevated.”

The Canadian economy will grow 2.4 per cent this year and 2.8 per cent in 2012, the central bank said, in a teaser to a full quarterly forecast it will release Wednesday. That compares with an October forecast of 2.3 per cent growth for this year and 2.6 per cent in 2012.

Those adjustments were not enough for the central bank to tweak its October projection for inflation to return to policy makers’ 2-per-cent target by the end of 2012, or for the "considerable slack" left over in the economy from the recession to be absorbed by the end of that year.

Although business investment is rebounding strongly and net exports are poised to start contributing more to economic growth as the impact of government stimulus fades and debt-strapped consumers spend less, companies and the goods and services they sell abroad still face headwinds, the bank said.

"The recovery in Canada is proceeding broadly as anticipated, with a period of more modest growth and the beginning of the expected rebalancing of demand," the central bank said Tuesday in the statement accompanying its decision. "However, cumulative effects of the persistent strength in the Canadian dollar and Canada’s poor relative productivity performance are restraining this recovery in net exports and contributing to a widening of Canada’s current account deficit to a 20-year high."

Without saying just how much of a kick Mr. Carney believes the crucial U.S. economy could get from the tax-cut package President Barack Obama and Republicans in Congress agreed to late last year, or the U.S. Federal Reserve’s controversial attempt to keep long-term interest rates low by buying $600-billion (U.S.) in bonds, the central bank said private demand in the United States has picked up and will be "reinforced" by both measures.

The European recovery, meanwhile, has been a bit stronger than central bankers anticipated, they said, but will be curbed by ongoing sovereign and bank debt problems in several countries, fuelling "a significant source of uncertainty" for the worldwide outlook. And as emerging markets like China take steps to keep their economies from overheating, the commodity prices that have soared since the central bank’s last quarterly forecast in October, benefiting producing nations like Canada, could start to drop as demand slows.

Taken together, all of these factors mean further rate hikes "would need to be carefully considered," the central bank said, repeating language it has used since October when Mr. Carney decided to pause his tightening campaign after three increases. The central bank also repeated language from past statements saying its decision to stand firm leaves "considerable monetary stimulus" in place -- a hint that Mr. Carney would be raising rates if he felt he could.

At the same time, measures introduced Monday by Finance Minister Jim Flaherty to clamp down on household debt, by making it harder for people to take on more obligations than they can afford, will likely give the central bank more flexibility to wait until it makes sense to raise rates throughout the economy rather than doing so to discourage a small subset of borrowers.

" Chinese companies are interested in high-end tech and skilled workers".....

When Chinese telecom manufacturer Huawei Technologies Co. Ltd. unveiled plans to spend $50-million on a new research and development facility in Ottawa last spring, it may have ushered in a new era of foreign investment in Canada.

With the region still reeling from thousands of job losses related to the collapse of the once-mighty Nortel Networks Corp., Shenzhen-based Huawei’s strategy to tap Ottawa’s pool of highly skilled technology workers for its new facility was heralded as welcome relief for a battered part of the economy.

Now, there are further signs China is looking beyond Canada’s resource sector for new investment opportunities that could help revive a besieged domestic manufacturing industry.

A survey of more than 1,300 mostly small and medium-sized enterprises (SMEs) from China shows strong interest in investing in Canadian manufacturing. About 8 per cent of the Chinese companies surveyed said they planned to invest in Canada within the next three years. Among those companies, the average size of intended overseas investment is $16.1-million (U.S.), according to the report prepared by the Asia Pacific Foundation of Canada and the China Council for the Promotion of International Trade.

Under the central government’s so-called Go Global strategy, which encourages companies to invest abroad, China has become a powerful player in the international competition for foreign direct investment. While much of Europe and North America continued last year to struggle to recover from the global financial crisis, Chinese companies plowed about $50-billion into assets and companies abroad.

Canada’s mining and energy sectors, and particularly the Alberta oil sands, have attracted the bulk of Chinese capital flowing into Canada in recent years. Chinese state-owned enterprises (SOEs) have made multibillion-dollar investments buying control of resource development projects in need of financing or taking minority stakes in assets that are already producing.

However, the report finds that among Chinese SMEs – which are defined as companies with less than 300 million renminbi ($45-million U.S.) in annual revenue – Canada’s struggling manufacturers were deemed the most likely destination for investment. Among respondents planning to invest in Canada, 49 per cent described the manufacturing sector as a prospective destination for capital.

Chinese companies are interested in Canada’s manufacturing sector not only for its access to the greater North American market, but also to acquire high-end technology and skilled managers and workers.

“Much of the investment is likely to help Chinese manufacturers move up the value chain. They’re not looking for cheap labour that they can get in Thailand, the Philippines or African countries. They’re looking for the kind of technological, management and marketing expertise that will allow them to become global companies,” said Yuen Pau Woo, president of the Asia Pacific Foundation of Canada.

In addition to encouraging companies to invest abroad, China has recently loosened restrictions on offshore trading in its currency, which is expected to promote more overseas investments by Chinese firms.

As well, China Investment Corp., the country’s $300-billion sovereign wealth fund, is setting up an office in Toronto to help identify investment opportunities in North America.

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