Slow growth in China putting pressure on Canadian commodities

TORONTO—The experts at BMO Harris Private Banking say slower than expected economic growth in China continues to affect commodity prices in Canada, and could lead to a softening of the Loonie.

“China, the world’s second-largest economy, started out 2013 with high expectations for a rebound that would take growth levels close to eight per cent for the year,” chief investment strategist Daniel Theriault said in a statement.

“But after four months of disappointing numbers, growth will likely come in at 7.6 per cent or lower. That, in turn, has Canadian commodities on alert.”

Part of its June market commentary, the financial firm said it has its sights squarely focused on central banks around the globe when it comes to bonds, but the United States Federal Reserve is particularly intriguing.

The Federal Reserve is now in its third stage of its bond buying program and has signaled that it intends to scale back its bond purchases sooner than expected.

The current large bond purchases are designed to boost the economy to be strong enough to stand on its own, but the market report notes the Fed’s pull-back strategy will have to be carefully orchestrated to prevent collapse in the U.S. economy.

“Such substantial increases in yield, like we saw for the 10-year Treasury Bond, can erode capital,” Theriault said. “While we expect short rates to remain low for a number of quarters yet, being in cash currently has a negative real return. The best strategy for protecting capital is to hold shorter maturities and higher coupons.”