Author: CIBC World Markets
Article Date: July 2007
The main topic of this month's StrategEcon report is $100 Oil. Gone are the days or assurances that technology will assist in untapping undiscovered reserves of cheap crude oil. The US National Petroleum Council is warning of depletion and steadily rising prices. The looming question is, "Why haven't soaring prices shackled demand?" Western European Economies have in fact seen a reduction in oil consumption over the last two years, with an introduction of gasoline taxes and subsidies for alternatives like biofuels. However, "newly empowered consumers in developing countries" are increasing their demands. If this trend continues, the developing world will consume more oil than the developed world in the next 10 years. The developing world has helped push oil above $70 per barrel, and possible new record highs later this year.
The US housing market is still under pressure and with a return to slower growth in the second half, a rate hike by the Fed's is unlikely. Thus, leaving the Treasury markets treading water over the forecast horizon. However the Bank of Canada anticipates another rate hike to come (further information is attached below in a recent Economic Flash dated July 24th, 2007). There is mention in this monthly report that a rate hike could be set aside, due to the Canadian dollar remaining stronger than anticipated by the BoC. However, with today's announcement re: Retails numbers, belief is another rate hike is almost certain. Even with July 10th's 25bp increase, a possible 25bp increase again in September, this is not believed to be a "full-fledged" tightening cycle.
The Canadian dollar continues to gain ground. Some support coming from much of what is mentioned above, US$ weakness and firming oil prices. Prediction is the Canadian dollar will continue to gain strength with increasing oil prices, even if the BoC doesn't deliver a rate hike. Job creation and trade surplus reveal an economy that has weathered the appreciation of the Canadian dollar surprisingly well. An elevated currency is being viewed as a necessary cooling for today's economy.
View The Entire Article: CIBC World Markets - July Economics & Strategy
