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1 FX Team Montreal Customer Service FX Team Toronto Customer Service Development Team Fixed Income & Commodity Major News this Week Housing starts in the U.S. were 954,000 in December, up 104,000 from November. On Thursday, the announcement of 335,000 initial jobless claims also made headlines; this is the lowest level since January This figure suggests growth in the job and real estate markets south of the border. China continues to release strong data, with GDP growing 7.9% (YoY) in the last quarter of Job creation figures for December were disappointing in Australia; the economy shed 5,500 jobs. On an annual basis that gives a meagre 49,800 jobs created for the year, the worst performance since Have a good week! Philippe Shebib Canada Forecast Previous Tuesday Retail Sales for November (MoM). -0.1% 0.7% Wednesday Friday Bank of Canada s Interest Rate Decision; no movement of the interest rate is expected by the analysts surveyed on Bloomberg. Consumer Price Index for December 2012 (YoY); the November result of 0.8% was the lowest since October % 1.00% 1.2% 0.8% United States Forecast Previous Wednesday House Price Index for November (MoM). 0.7% 0.5% CB Leading Index from December (MoM). 0.4% -0.2% Thursday Initial Jobless Claims from last week; we will be watching to see if the good 358, ,000 figure posted last week is the start of a trend. Friday New Home Sales for December , ,000 International Forecast Previous Tuesday Bank of Japan s Interest Rate Decision; we will be parsing the announcement to see if they can tame the severe deflation they have been battling since the 1990s and an announcement of their target inflation range, which may move from 0% to 2%. 0.1% 0.1% Wednesday Australia s Consumer Price Index for the third quarter of 2012 (YoY). 2.4% 2.0% Friday United Kingdom s Gross Domestic Product for Q (YoY). 0.2% 0% 1

2 The Loonie Rarely do we find men who willingly engage in hard, solid thinking. There is an almost universal quest for easy answers and half-baked solutions. Nothing pains some people more than having to think. Martin Luther King, Jr. In late December, U.S. stock markets were bracing themselves for a potential fall from the fiscal cliff. But an agreement between Republicans and the President at the 11th hour occurred and euphoria took hold of the markets. The S&P 500 has gained more than 5% since the resolution of the conflict surrounding the fiscal cliff, reaching 1485, its highest level in 5 years. However, if the past is any indicator of the future, we believe that this excitement has the possibility of being short lived as the next source of heated debate between Democrats and Republicans is just around the corner, the debt ceiling. This limit, established by a Congress controlled by Republicans, on the debt that the U.S. government may contract currently stands at 16.4 trillion. However, given the anticipated revenues and the expenses that the Obama administration must make in order to keep all programs currently in place (from Medicare to defense programs), this threshold will be reached somewhere between mid- February and mid-march. At the summer of 2011, in the middle of the saga surrounding the last increase in this limit, the disputes between the Republicans and Democrats had created quite a stir in the markets, the S&P 500 falling by nearly 16% in two weeks. These quarrels had even pushed the rating agency Standard & Poors to lower the credit rating of the United States (from AAA to AA +), the first time in the country s history. *Source : Bloomberg The graph above shows the relationship between the VIX Index (white line) and SP500 (green line). The VIX is used as an indicator of volatility of the S&P 500. The higher its value, the more stock markets are seen as being volatile, or nervous. While the value of 48 reached in 2011 is its highest reading since the 2008 financial crisis, the current level of indicates that traders are not yet worried about the uncertainty that awaits us. The debt ceiling has been raised 79 times since 1960 and we do not believe that the outcome will be different this time around. However, if the negotiations take too much time, uncertainty will sway the markets, the VIX index will gain in strength and the other two major rating agencies, Moody's and Fitch, will be tempted to lower the U.S. credit rating. And if that happens, we ll be in unchartered territories. Gardy Pharel 2

3 Technical Analysis: USDCAD and EURUSD (Monday 21 January, 2013) USDCAD: Interesting price action on the USDCAD which climbed above its 100-d and 50-d moving averages. We were expecting a continuation of the drop toward ; is the low so far. 2 elements are worth noticing before we can talk about a strong uptrend: 1- The 200-d moving average at and the high of 2013 at are still well in place 2- The US equity index S&P 500 is stubbornly rising, which usually pushes the CAD higher In this context, USD sellers should leave orders up to and between and is is broken. Buyers should hedge their payables at the current levels and leave stop loss orders close to parity. USD/CAD res. levels Support levels EURUSD: Double top at , objective at Olivier Cosialls 3

4 Fixed Income Canadian manufacturing sales experienced an increase of 1.7% in November from their October levels. Regardless, Canada s economy still grows below consensus which brings analysts to question the intentions of the Bank of Canada this week. Last Friday, the House of Representatives agreed to raise the U.S. debt ceiling limit for 3 months in an attempt to deter the largest economy to default on its obligations. In the coming weeks, both houses in Congress will once more enter into heated debates that, in the end, will gracefully wrap up with an agreement. Markets are waiting in anticipation for the Bank of Canada rate announcement this week as nearly 50% of analysts expect a rate hike before the end of this year. In addition, Canadian CPI numbers for December will be released on Friday to round out the week. Further fourth-quarter U.S and Canadian corporate earnings are scheduled for release this week. We can surely expect some volatility in the coming days. Wishing you a great week! Rana Karim Canada Key short-term rates Weekly change Yearly change % 5 yr CAD Goverment Bond Yield 18-Jan Jan-13 Change (pbs) 19-Jan-12 Change (pbs) 1.6 Overnight Rate % % % 0.0-3M Bill (Federal) % % % month CDOR % % % 2.0 Prime rate % % % Government bonds Weekly change Yearly change 18-Jan Jan-13 Change (pbs) 19-Jan-12 Change (pbs) 2 year 1.180% 1.193% % year 1.468% 1.480% % year 1.920% 1.941% % /21/12 12/5/12 12/19/12 1/2/13 1/16/13 30 year 2.495% 2.506% % -7.7 United States Key short-term rates Weekly change Yearly change % 18-Jan Jan-13 Change (pbs) 19-Jan-12 Change (pbs) yr US Government Bond Yield Fed Funds target 0.250% 0.250% % 0.0-3M Tbill 0.071% 0.066% % month LIBOR 0.205% 0.206% % -7.4 Prime rate 3.250% 3.250% % Government bonds Weekly change Yearly change 18-Jan Jan-13 Change (pbs) 19-Jan-12 Change (pbs) 2 year 0.252% 0.251% % year 0.760% 0.780% % year 1.843% 1.869% % /21/12 30 year 3.030% 3.048% % /5/12 12/19/12 1/2/13 1/16/13 4

5 Commodities WTI crude ended the week at over $95/barrel, its highest price in four months. The rise can be traced to several items in the news: The International Energy Agency (IEA) raised its forecasts of global demand for oil. In 2013, global demand should increase 1% to a record consumption of 90.8 million barrels per day (mbd); Global consumption of crude oil has grown from 80 mbd in 2003 to over 90 mbd in 2012; China posted economic growth of 7.9% (QoQ) for Q4 2012, up almost 0.5% from the previous quarter. Improved economic conditions in China will surely be favourable for commodity prices; We continue to pay attention to the reduced spread between prices for Brent and WTI crude. The difference between these two benchmarks is now $15, down from the peak of $27.88 in October This continues to favour conversions of crude oil transactions into heating oil transactions. A growing global economy should support prices over the next year. The next time that fuel prices decline should be considered as a good opportunity to implement hedging strategies. Have a great week! Emmanuel Tessier-Fleury Open Prior Year 21-Jan Jan-13 Variation To date Natural Gas (Aeco) CRUDE OIL (CAD/BARIL) % 3.70% HEATING OIL % 0.43% GASOLINE % -0.82% NATURAL GAS (CAD/GJ) % 4.51% RACK PRICE DIESEL RACK PRICE HO RACK PRICE GASOLINE SWAP PRICE Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 SWAP PRICE % 0.94% % 0.52% % -1.04% CRUDE OIL (CAD/BARIL) NATURAL GAS (CAD/GJ) HEATING OIL Equivalent RACK MTL DIESEL RBOB Equivalent RACK MTL GASOLINE Q Q Q Q Q Jul Jul-12 Crude Oil 5

6 Last Week at a Glance Canada In November, manufacturing shipments rose 1.7%. The prior month s figure was revised up from - 1.4% to -1.2%. Sales in November advanced in 12 of the 21 broad industries covered. Though new orders sagged 0.6%, the inventory-to-sale ratio fell to an eight-month low of Shipments progressed 1.6% in real terms. The performance was better than expected but it only made up part of the prior month's slump (-2.2%). Hence, while the increase in volumes should add to GDP in November, the weak start to the quarter means factories will likely to be a drag on GDP in 2012Q4. Two months into the quarter, real factory shipments are down an annualized 3.4%, their worst quarterly showing since 2012Q1. We still expect Q4 GDP growth to peg in below 1% annualized, which would make for a second successive sub-2% print. According to the Canadian Real Estate Association, 35,386 homes were sold in December 2012, down 0.5% from the previous month and 17.4% from a year earlier. Four out of every five local markets reported year-over-year declines. Calgary was a notable exception (up 7%). The results of the BoC's Senior Loan Officer Survey for Q4 indicated an easing in overall credit conditions an in both price and non-price terms of business lending. The Winter edition of the Business Outlook Survey (conducted November 19 to December 13) showed expectations regarding sales growth over the next 12 months had risen sharply, with the balance of opinion springing to 16 from zero in the Fall edition. This suggests the Canadian economy is unlikely to decelerate further from the sub-1% pace registered in the second half of United States In December, retail sales were up 0.5%. Sales growth in the previous month was revised up a tick to 0.4%. Discretionary spending (i.e., retail sales excluding gasoline, groceries, and health/personal care) jumped 0.8% after gaining 1.3% the month before. U.S. real retail spending grew at an annualized pace of about 4.2% in Q4, compared with 3.8% in Q3. Nominal discretionary spending grew 6.4%, compared with 5.5% in Q3. In other words, U.S. GDP received some decent support from consumers in the final quarter of the year. Again in December, housing starts climbed to 954K from a downwardly revised 851K the prior month. The reading was the highest since June 2008 and overshot consensus estimates for the month (890K) by a long stretch. The 12.1% increase in starts was driven by both singles (8.1%), and multiples (20.3%). Building permits were roughly unchanged at 903K. These stats confirm that GDP enjoyed strong support from the residential construction sector in 2012Q4. Still in December, industrial production swelled 0.3% in line with consensus expectations. However, the prior month s growth was revised down a tick to 1%. Manufacturing output expanded 0.8% on top of the upwardly revised 1.3% increase the month before. In January, the New York Fed s Empire State Index of Manufacturing Activity slid to -7.8 from -7.3 the previous month. This marked a sixth consecutive month in negative territory for the index. Meanwhile, the Philadelphia Fed Index of Manufacturing Activity continued to seesaw, dropping to -5.8 after rebounding in December. These two reports suggest some weakness in manufacturing activity going into the New Year and should remind the markets not to be complacent about U.S. economic prospects. Indeed, the outlook remains highly uncertain, all the more so in light of the unfinished business concerning fiscal policy. 6

7 Back in December, the consumer price index (CPI) remained flat as lower energy prices (-1.2%) were exactly offset by higher prices elsewhere, including food (+0.2%). The annual inflation rate slipped a tick to 1.7% instead of holding steady at 1.8% as expected by consensus. Excluding food and energy, the year-on-year core inflation rate was unchanged at 1.9% in line with consensus. The U.S. annual inflation rate is trending down and the moderation in upstream prices (i.e., the PPI sank 0.2% in December) further points in that direction. Paul André Pinsonnault, Strategy and Economic department NBC 7

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