Friday, September 23, 2011

Outlook for interest rates long term

The ongoing issues facing Europe as they brace themselves for the inevitable Greek default. Even Mark Carney and the US Fed are expressing their concerns and impatience with the EU's failure to find a solution. In the meantime, Ben Bernanke reaches back in time to find a creative solution to stimulate the US economy called
'Operation Twist' - a strategy that has not been used since 1961!

When I heard the term “Operation Twist” last week, I was intrigued. The original Operation Twist was developed by the U.S. Treasury in 1961 in order to lower long term borrowing rates, in an effort to encourage investment and grow the economy, while simultaneously raising short-term rates to reduce pressure on the dollar. Essentially, it was an effort to purposely invert the yield curve. Thus the ''twist'' in Operation Twist. Part of the operation involved direct intervention in the market for residential mortgages.
Yesterday, the US Fed announced a similar, albeit incremental form of intervention in response to the meltdown in the housing and financial markets. In response, the dollar soared and there is now some hope that the costs of longer-term borrowing will be reduced.
Bottom line - things in the US and Europe are going to get a lot worse before they get any better. This will result in a further drag on the Canadian economy and prolong the period of low interest rates.

2 comments:

  1. I wanted to touch base with you all and let you know what is currently happening in the currency market. To begin, the Canadian dollar is now worse than par. This is the highest the USD has been since May 2010. The decline of the Canadian dollar took place on Wednesday after stated the Federal Open Market Committee (USA) came out with its policy statement for its September 2011 meeting. The following key points were made;

    First, there will be no change to the overnight lending rate until at least 2013.

    Second, the Fed’s assessment of the global economy worsened, as they cited “significant downside risks to the economic outlook, including strains in global financial markets”.

    Finally, they announced a larger-than-expected plan to sell $400 billion of three-year or shorter-term treasuries and buy an equivalent amount of six-to 30-year treasuries by the end of 2012. This will decrease the cost of borrowing over the longer term, and the market reacted accordingly, with the yield spread on two-year notes and ten-year notes flattening by 0.12% to 1.66%.



    Although the credit markets has accounted for this move, it will be interesting to see how equity, commodity and currency markets react in the coming months. Yesterday, Commodities to the biggest hit. Oil slid 2.6% overnight after a massive 6.3% selloff yesterday. Interestingly enough, gold is not even immune to the selling fad, showing a 1.98% loss overnight. The US dollar is pretty much the only thing showing black this morning, as it benefits from the massive rush to safety against all currencies.




    Today the markets are a little more stable. The Canadian dollar has rebounded $.75 from the worst rate we saw yesterday and Oil is unchanged so far today. I am often asked why the USD gains strength when their market is so volatile. The answer is simple, whenever there is a fear of recession or a particular economy maybe collapsing (example Greece), countries and investors buy the USD in mass quantities. The reason for this is similar to why the value of gold is trading in the $1600-1800 range. If there is a world recession, besides bartering with physical gold, the USD is considered the world currency, all other currencies will have no value.




    Now having said all this, what do we expect to happen over the next few months? It is hard to say as no one has a crystal ball. We have been told to expect the CAD to USD range to be between .98 to 1.05. With oil trading at $80 a barrel, it needs to rally $5-$10 to hopefully bring us back to parity. At this moment CAD to USD is trading in the 1.03s.

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  2. It is expected that the economic status of the country will not be stable at all times.We should always be open to whatever changes and difficulties and look for a solutions on each issues.

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