Will Stephen Poloz finally 'talk down' the loonie?


Top of the Morning

Robert Cyran of Reuters Breakingviews writes that investors’ enthusiasm for M&A has been excessive and bucks the historical trend:

Cognizant Technology Solutions may have good reasons for buying health care IT provider TriZetto. But promises of revenue synergies mixed with published materials full of jargon should provoke investor skepticism, not an immediate pop in the buyer’s shares. It’s just one symptom of simmering M&A exuberance…

Just over two-thirds of U.S. acquirers in deals worth at least $1-billion [this year] have seen their shares rise. That’s much more encouraging for deal-making executives than the norm: From 2008 to 2012, the majority of buyers experienced a decline in their stock prices when they announced acquisitions…

Meanwhile, hostile bids have become unusually common this year, often a sign that a merger wave is becoming toppy.

On the Homefront

TSX 60 futures are moving lower ahead of the open after the composite index gave back ground on Monday.


The yield on the five-year Government of Canada bond tumbled overnight, falling nearly two basis points to hover around 1.68 percent.


The loonie is holding yesterday’s gains early this morning, trading above 0.905 against the greenback. “Absent a catalyst to direct the USD, the Canadian dollar gained against all G10 peers, with the loonie advancing +0.4 percent versus the U.S,” writes Adrian Miller, director of fixed income strategy at GMP Securities. “The advance in the loonie was also aided by the OECD report that stated Canada will grow at the second fastest pact among G7 countries, second only to the U.K. even as the group cut Canada’s 2014 growth forecast.”


Poloz makes his most important speech yet. At 12:45pm (EDT), Bank of Canada Governor Stephen Poloz will deliver a speech in Drummondville, Quebec on the role of the exchange rate in the economy and the central bank’s policy framework. Despite widespread claims that the governor has “talked down” the loonie, he’s actually been loathe to offer much commentary on the value of the Canadian dollar at all. That will certainly change today. As analysts at Citi note, there is a noticeable “Poloz effect” – on days when the governor speaks publicly, the loonie falls by more than the euro does on days when Draghi speaks, or the yen on days when Kuroda speaks, and so on. Now, this doesn’t mean Poloz jawbones the currency lower. It does imply that he’s found it more successful to achieve this hidden agenda of a lower currency to help give exports a lift by covert means – talking about too-low inflation or the lingering output gap – rather than adopting the approach of the Reserve Bank of Australia’s Glenn Stevens, whose tired refrain that the aussie is overvalued usually falls upon deaf ears. Poloz has, no doubt, undergone an evolution of sorts when it comes to the exchange rate. Early on in his tenure atop the central bank, he referred to it as one of many variables that monetary policymakers take into account when setting policy; more recently, he has deemed the foreign exchange rate to be critical to the Bank’s analysis. “It’s hard for the governor to be more dovish than he’s been,” says CIBC chief economist Avery Shenfeld. “He’s staked out a dovish position.” Look for Poloz to receive questions on the still-lagging recovery of export segments the Bank has deemed to be sensitive to exchange-rate fluctuations, how the level of the Canadian dollar may affect the eventual ceiling for the overnight rate this cycle, and exchange rate pass-through to core (the extent to which a decline in the currency spurs an increase in the Bank’s less volatile gauge of inflation).


Dutch-based telecom sells stake in Canada’s fourth-largest wireless carrier. After the close on Monday, The Wall Street Journal was the first to report that VimpelCom Ltd., majority owner of Wind Mobile, is set to sell its stake in the struggling carrier. The buyer is Globalive Capital, an investment fund run by Wind Chairman and CEO Anthony Lacavera, which has secured financing from a consortium headed by Toronto-based hedge fund West Face Capital. In a press release, the Dutch telecom giant formally acknowledged the sale of its position in Wind for $135 million and the assumption of debt, which brings the total value of the deal close to $300 million. Globalive also confirmed the news. This purchase price is a sizeable premium to the value VimpelCom attached to Wind back in March, which was $0. This transaction will need to be approved by the Competition Bureau and Industry Canada, but seems likely to receive the government’s blessing. This development signals progress in Ottawa’s attempt to foster a fourth major wireless player in Canada, as Wind’s new deep-pocketed backers will likely ensure it has the funds necessary to purchase a block of spectrum in the 2015 auction, an investment VimpelCom was unwilling to commit to this year.


Valeant’s attempt to acquire Allergan nearing the home stretch. After the market closed on Monday, Valeant Pharmaceuticals (VRX) published a number of slide decks and other filings, including its intention to redeem the outstanding amount of $500 million in senior notes due 2017 on October 15. In two presentations, the company defended its approach to R&D, highlighted the massive growth potential for aesthetics, an outlined its plans for integrating Allergan. This morning, Valeant and Allergan came to an agreement that solidifies the date of the special meeting (December 18), helping both sides avoid litigation costs.


Spain’s biggest bank buys Canadian car financing company. Bloomberg reports that Banco Santander SA will be purchasing Carfinco (CFN), which provides car loans to borrowers unable to access traditional sources, for just under $300 million. That’s a premium over over 30 percent to Carfinco’s average closing price over the past 90 days. The bank highlighted the Canadian market’s “good growth potential.”

Daily Dispatches

Foreign direct investment in China plunged in August, falling 14 percent year-over-year to its lowest level in two and a half years, according to Reuters. On a year-to-date basis, FDI is down 1.8 percent compared to 2013. This soft print follows a string of weak Chinese data released over the weekend that weighed on the TSX’s base metals miners on Monday.


Inflation in the U.K. slowed to a five-year low in August as food price deflation detracted from the headline rate. The core rate, however, edged higher to 1.9 percent. This reading gives the Bank of England’s Mark Carney the necessary wiggle room to shift back to a slightly more dovish stance if he so chooses. House price inflation, however, is running at a much higher clip, with the U.K.’s House Price Index up 11.7 percent year-over-year in July.


German investor confidence dipped to its lowest level since the end of 2012, but still came in above analysts’ expectations. The hope is that aggressive stimulus from the European Central Bank will offset continued fiscal drag and allow euro area economies to enjoy a modicum of growth. “Investor confidence remains fragile across the euro area with both geopolitical and economic concerns weighing on Europe’s largest economy,” writes Bank of Montreal economist Carl Campus.


There are four key event risks that could really shape all asset classes over the coming weeks and months- and they’re right around the corner, writes IG chief market strategist Chris Weston. He highlights the Alibaba initial public offering, the implementation of the European Central Bank’s move to offer longer-term, low-interest rate loans to banks (with the requirement that these funds be lent to the private sector), the Scottish referendum (as the market is not currently positioned for the side supporting independence to come out on top), and, of course, the Federal Reserve’s statement, projections and press conference. “With the U.S. bond market at the center of the financial world, dictating flows in every other asset class (even down to sentiment around holding micro-cap equity), Wednesday’s FOMC meeting is critical,” he writes.