Monday, 22 July 2013

Canadian Dollar Considers Next Crude Move

Ralph Shell, Excel Analyst

No sooner had Ben Bernanke declared that the US economy was not growing fast enough to withdraw the monetary stimulus, we heard from Detroit.  Yes, the once 6th-largest city in the US filed for bankruptcy.  Not that this should be surprising, since the city had been mis-managed for years.  Serious effort to balance the budget was lacking, crime prevailed on the streets and politicians running the city paid themselves and their supporters who worked for the city well.

Tax receipts dwindled as businesses and families fled the city.  The budget deficits that were incurred continued to grow as did the amount of money the city needed to borrow each year.  It will take years for the army of lawyers to resolve the shortage of about $20B and decide who will take the hit.

There are some Pollyannas who may conclude this is a 'one-off' event that will not happen again.  No problem, then, to keep buying the tax exempt municipal bonds.  I doubt it will work this way as the ripples from the Detroit bankruptcy spread to other cities.  Friday, Bloomberg said there were "false and misleading statements" in a 2009 offering, as they reported the SEC accused the city of Miami Florida of making statements in a 2009 offering.

The reasons for the economic malaise are complex, and they affect other cities, in addition to Detroit. 

Back in the 50's, when the productive capacity of much of the world was recovering after WW2, Detroit had little competition as they built the cars.  US wages went up as Walter Reuther, head of the United Auto Workers negotiated each new contract.  Then, in the early 1970's cheaper cars began to arrive first from Japan, and then elsewhere.  The high UAW wages resulted in fewer high-paying auto industry jobs, as well as taxes needed to pay for the mis-management of Detroit.

The US would be much better off if they would relax the work visa requirements for those with skills. Last year, there were 764,495 foreign students studying in the US.  In a way, the US is like Ireland: once students are educated, they are sent away to find work elsewhere.  Canada, with a shortage of skilled workers, is now running ads on US West Coast billboards inviting them to move to Canada where it is easier to get a work visa.

Chicago is another big city with financial problems.  Chicago Public Schools claim they have a $1B deficit in the coming year.  Friday, they announced they will lay off 2000 employees, of whom half are teachers.  This comes after they announced the closing of 49 grade schools and 1 high school, this coming year.

Like Detroit, Chicago has become a crime-infested city.  In 2012, there were 500 murders in Chicago, and that record may be broken in 2013.  As expected those who are able are leaving the city, and the decay grows.

The Detroit saga will continue.  Last Friday afternoon (July 19th), a Michigan judge ruled that it is against Michigan law for insolvent Detroit to file bankruptcy.

These are some of the travails of the US economy reported to be one of the recovery models following the 2008 recession.  With Europe still contracting, and the Chinese economy giving mixed signals, is the global recovery still scheduled, and if so where does the leadership come from?

CANADA
The crude market is certainly betting on a recovery.  Friday last, we were trading above 108 and the WTI is trading at a premium to Brent.  Canada is a big beneficiary of this move.

"Prices for Canadian heavy oil – Western Canada Select – have climbed even more quickly than WTI this year. Compared to a whopping $40 discount late last year, the WCS-to-WTI discount had narrowed to $16.50 a barrel Thursday, according to Net Energy Inc."

Canada should benefit from the elevated price of the WCS oil.  There is also increased oil shipments by rail and, despite the Obama objection to the Keystone pipeline other pipelines are being constructed.

Click to Enlarge USDCAD Weekly Forex Chart

While the US continues to confront problems such as the inter cities and excessive state debt in California and Illinois and other states, Canada appears to be free of some of these problems.  Since we last visited the Canadian Dollar (July 2nd), when it had just made a two-year low versus the USD, it has gained some strength. Currently, we are trading at 1.0363 after briefly topping the 1.06 handle end last week.
Click to Enlarge USDCAD Daily Forex Chart
It looks like the USD could lose more to the C$, perhaps to the 1.0150 area.  There are some problems in the US and the C$ may be a better place to park some money.  As always, manage your money.
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