Not So Labour Day - September 6, 2016

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Tomorrow sees the Bank of Canada rate announcement and near-term economic statement. An improving trade balance and steady oil prices have helped CAD; Q3 appears to be off to a good start. The CAD rallied nicely, recovering lost ground on improving balance of trade numbers (-2.5 bln vs call -3.2 bln) and a surprisingly good June mth/mth GDP report (+0.6% vs call +0.4%) leading to speculation of a strong Q3 but the betting is that the BoC will leave rates unchanged at 0.50%

The greater Vancouver area housing market may have discovered that, like Newton's apple, gravity really does exist. The recently imposed 15% tax on foreign buyers in BC has definitely cooled the market in Vancouver and its environs. Ottawa, along with the BoC, has been flagging its concern about housing markets in Toronto and Vancouver for some time now, so doubtless Stephen Poloz will have something to say about this tomorrow.

The JPY continued to flounder against the USD, largely due to ongoing political developments between the Bank of Japan and Ministry of Finance. The angle seems to be that both Japanese bureaucracies had been hoping for a quick Fed rate hike, weakening the JPY and thus obviating the need for further easing or domestic stimulus packages. As it is now unclear whether the Fed will raise rates soon, these hopes were stymied and, once again, the Japanese will have to resort to the unconventional and, to date, largely unsuccessful attempts at reviving their moribund economy. As an indication of the desperation of the Japanese authorities, an advisor to PM Abe, one Koichi Hamada, stands out. He suggested that, given the lack of domestic bonds for the BOJ to purchase as part of its ongoing QE programme (which has driven Japanese bond yields into negative territory), the BOJ could start purchasing foreign currency-denominated bonds. Such action would be likely viewed with disfavour by other G7 nations as being a de facto intervention or worse and, as such, probably won't go any further than the talking stage. But it is indicative of the need, after decades of failed policy, for the Japanese authorities to try a different approach, something other than QE and negative rates.

Which brings us to the USD. After the previous week's one-two punch from Fed chair Janet Yellen and vice-chair Stanley Fischer, expectations had mounted for a September rate hike and possibly a further hike in December. But, as it turned out, the numbers simply weren't there. Several key statistics released last week show ongoing weakness in the American economy: Employment came in at 4.9% vs call of 4.8%, with total jobs rising just 151K, below the average call of 180K; ISM Manufacturing Index fell into recessionary levels at 49.4, vs the call of 52.0; and Chicago PMI, a closely-watched regional gauge, declined to 51.5 from the previous 55.9 and well below the call of 54.5.

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Some analysts are taking the view that last Friday's jobs numbers are 'good enough' to entice the Fed into raising rates. Perhaps, perhaps not. This week sees very little in the way of meaningful economic stats stateside, certainly none that would cause the Fed to re-assess its view of the economy.

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