Canadian Personal Finance Blog

Parity Between US Buck and Loonie?

That is what the CIBC and their analyst Zafar Bhatti thinks. Same reasons as previous Loonie flights but still worth noting:

• Commodity prices, and Canada being the Northern Resource Kingdom to the U.S. (and a lot of the world)
• Potential for higher interest rates in Canada, thus strengthening the dollar (remember targets are June)
• Canada is a good investment in terms of our credit balance. Yes our Government is in debt, but nothing like the Americans, and most of our debt is held by Canadians themselves (i.e. Savings Bonds), so we are a good risk (maybe we can get a Amex Platinum for Nations?)

An excellent quote from the CIBC is:

…This puts the Bank of Canada between a rock and a hard place, if they signal rates are going to rise, the Canadian dollar will make a run for parity or stronger…

A blip over the summer with a subsiding in the fall might be a good thing for Canadian consumers, maybe.

Big Deal!

Well, actually it can be a very big deal if the Canadian dollar gets really strong, it will cause Canadian products to be too expensive for your Yankee cousins (whether the Canadian dollar strengthens against the Chinese currency and the Euro remains to be seen). Many, many small Canadian firms rely on trade with the U.S. and a soaring Loonie will cause that market to dry up, unless the manufacturers slash prices in reaction to this rise.

Reverse cross border shopping will start again. Many things are cheaper in the U.S. if you simply look at the price tag, and if the Canadian Dollar can buy the same as a U.S. dollar, why shop in Canada? For someone in Ottawa you are 55 minutes from Ogdensburg, and not that far from other U.S. towns and cities that will see an influx of “Frost Back” Canadians with their Beaver Bucks in hand. This will help these border towns a great deal, but will have the reverse effect on Canadian border towns.

Is this a permanent thing? I have no bloody idea, but I am now looking at US Index funds (and ETF’s) thinking that if the Canadian dollar goes any higher am I getting a bargain? As is pointed out in the CIBC report, if American Inflation explodes (say because their Government is printing money as fast as they can spend it) and the U.S. Central Bank has to raise interest rates, then this will simply be a “bulge” which will subside quickly and the Canadian Dollar may slide back to where it has been (of course if Canadian Inflation explodes in reaction to American Inflation, the two factors may cancel each other out).

I would encourage you to read over this very interesting report and form your own ideas and opinions about where we are going from here (economically).

Don’t we live in interesting times?

No Rate Hikes

So the Bank of Canada kept their overnight target rate at 1/4 per cent for March, giving us all cheap money for a little while longer. Rememmber that the C.D. Howe institute last week urged the bank to go Harder, Faster with their rate increases, but the bank is holding off for now.

The telling phrase to read in this report is:

“…Conditional on the current outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target….”

So the end of the second quarter, or say the June/July time frame, money is going to start getting tighter, which could make for an interesting summer.

Time to start planning on how you are dealing with your debt (if you have it) with a higher interest rate, or what to do about your Bonds, given interest rates will go up.

Federal Budget Looms

I suppose Larry MacDonald will again be locked in a large room with a bunch of other “sweaty” financial newspaper types in preparation for the Federal Budget scheduled for March 4th. Larry always has interesting stories about what really goes on in that room, while all these “touts” pour over the budget to boil the essence of it down to a 1 minute blurb on TV or 750 words or less for the papers.

Hopefully we shall move back to a more balanced budget and maybe put together a plan to start paying off the national debt (again), but stay tuned, I am sure there will be something exciting on Thursday.

Harder Faster

That is actually one of my favorite April Wine albums, but unfortunately it is also the message the C.D. Howe Institute is pushing for Interest Rate increases this year in their report How Soon? How Fast? Interest Rates and Other Monetary Policy Decisions in 2010.

The report itself is a very interesting read on how and why things have happened in terms of credit and interest rates, however, there is a nasty little recommendation that is in it:

When the overnight rate does begin to rise, the changes must be as aggressive as the rate cuts of 2008 and 2009 with increases of 50 basis points at every announcement date until mid-2011 not seeming unrealistic.

Remember how quick and dramatic the rate cuts were last year? There may be an equal and opposite reaction in terms of speed and rate increase this summer and into 2011, which will cause a tightening of credit and tumult in the bond markets too.

Were you planning on renewing your mortgage, or getting a new one? Might be time to lock into whatever rate you can find now, if you need to, since it seems we are in for a bumpier ride in the interest rate world.

And The Winners Are

Yes there were 10’s of entrants to get the free copies of Quicktax, and the winners are:

• • • 2Hirondelles, who was selected by my son from my lucky Pittsburgh Steelers hat.
    • JohnnyG, who was selected by my wife from that same lucky hat!

I will be contacting you via e-mail on how you would like to receive your free software. Congrats to all entrants.

There will be more giveaways soon (as soon as someone gives me more stuff to give away).

This is getting a little repetitive but Bank of Canada’s key overnight rate remains at 1/4% unchanged again this month. The overall Bank Rate remains at 1/2% as well, which means cheap money continues in the market place.

The statement from the bank is mostly that the recovery continues and we should be out of this whole mess some time near the end of 2010 or the beginning of 2011, but the important line to read is:

Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target.

The end of the second quarter is June, which means interest rates will be going up this year, and you are running out of time to take advantage of these cheap rates to pay down your debt (assuming you are not paying Credit Card debt, in which case, this has no effect on you). If you have a variable rate mortgage can you lock in, or has the bank already altered it’s rates so that locking in might not be as attractive now?

Remember if the bank raises interest rates to say 2.5% somewhere along the line, that is a huge percentage increase compared to where they are right now.

CPI Numbers Today Too

To confirm the Bank of Canada’s inflation statement, Stats Canada will be posting the CPI numbers for the end of 2009, which should be a very interesting statement. With gas prices inching their way back to $1 per liter, I suspect inflation is back it’s just how bad is the question.

In the past few days there have been a few headlines that most folks who knew about the subject would say, “Well that was obvious wasn’t it?”:

• Former baseball star admits to steroid use. The only thing new here is that the player in question is admitting to it (mostly because he wants to take a job back in baseball). No surprise there, kind of obvious really
• A man who kept a “pet” tiger was mauled to death by the creature. The surprising part is that the beast hadn’t done it sooner.
• Snow falls in Ottawa in January, OK that is a trick one, but not very surprising, and certainly not a big news story.
• Financial bloggers see tough times ahead, again, not a surprise either.

Financial Surprises

In contrast I was surprised to see that my Secured Line of Credit and my Unsecured Line of Credit have the exact same interest rate (currently). For those unaware typically a secured line of credit has a lower interest rate because it is secured against something of higher value (e.g. a house), and an unsecured line of credit is simply the bank figuring you are a reliable enough person to loan money (and presumably pay it back in a timely fashion).

My guess is this is a fiduciary anomaly, and will soon be remedied by my bank, but given I don’t use the unsecured loan vehicle, maybe it won’t be? I’ll keep watching to see if and when my bank notices this interesting situation.

What will I be surprised by next? Free Banking?