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Beyond Keystone

Beyond Keystone

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Published by nick_logan9361
Beyond Keystone
Beyond Keystone

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Published by: nick_logan9361 on Apr 03, 2013
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CIBC World Markets Inc. PO Box 500, 161 Bay Street, Brookield Place, Toronto, Canada M5J 2S8 • Bloomberg @ CIBC • (416) 594-7000CIBC World Markets Corp •
300 Madison Avenue, New York, NY 10017 • (212) 856-4000, (800) 999-6726
Avery Sheneld(416) 594-7356
Benjamin Tal(416) 956-3698
Peter Buchanan(416) 594-7354
Warren Lovely(416) 594-8041
Emanuella Enenajor(416) 956-6527
emanuella.enenajor@cibc.ca Andrew Grantham(416) 956-3219andrew.grantham@cibc.ca
“text text text” 
http://research.cibcwm.com/res/Eco/ EcoResearch.html 
Judging by the ramp-up in Canada’smessaging to Washington, which hasincluded everyone rom energy sectorparticipants, politicians and hockey coaches,we’re in the inal crunch on a WhiteHouse decision over the Keystone pipelineproject. There will be a sigh o relie iPresident Obama is able to put aside meresymbolism and approve a project that willhave no material bearing on global climate,particularly relative to what America coulddo i it took its own coal appetite seriously.But recent developments in the global oilindustry—rom Venezuela to Iraq, romNorth Dakota to Mexico, rom Caliornia toChina—suggest that Keystone is just one oseveral important pieces o the puzzle orCanada’s energy sector. Three key trends—rising shale oil prospects stateside, the shit inconsumption growth to Asia, and a growinglist o oil producing countries open to oreignparticipation—all pose challenges i Canadais to maximize the value o its resource base(see pages 6-8).Keystone will improve access stateside, andput a cap on adverse price dierentials orWestern Canadian producers. But growthin US shale output, coupled with a muchsoter trajectory or medium term demandgrowth stateside, put America’s net importrequirements on a collision course withCanadian plans to ramp up its output by aurther two million bbl/day over the balanceo this decade.Long term projections or the US to be ullysel-sucient have to be taken with a graino salt, but it’s now less clear that Americanswill need every drop Canada could export.The world will still need Canada’s crude,given still ample demand growth aheador Asia, and we doubt supply-demandconditions will permanently sustain pricesbelow Canadian project break-evens. But it’sincreasingly important that Canada move onone or more o the alternative pipelines toget our product headed Asia’s way. Canada’sown central and eastern oilmarketsareoil marketsaremarkets areanother option, but longer term demandgrowth there is also likely to be lacklustre.Clarity on the pipeline ront will also becritical to attracting the capital—bothdomestic and oreign—needed to nance thegrowth in Canadian production. Only a hal-decade ago, due to restrictions elsewhere,Canada represented more than hal o thereserves accessible to oreign capital. Today,there are many more competitors or thosesame investor dollars. Not only in the USshale plays, but much urther aeld. Iraq isrebuilding, Mexico is looking more open toinfows o oreign capital and expertise, andthe winds o political change could at somepoint see the same swing in Venezuela.The policy implication or Canada is thatwhile Ottawa has imposed some newrestraints on oil sands activity by oreignstate-owned enterprise, other measureson the policy dial may have to move theother way. With more competition orinvestor dollars, decit-ghting ederal andprovincial governments may have less roomto manoeuvre in setting taxes and royaltiesthan was earlier the case. Both pipelines andreasonable royalties will be critical to avoidkilling the black-gold goose.
Beyond Keystone
by Avery Sheneld
 April 3, 2013
“Three key trends...all pose challengesif Canada is tomaximize the valueof its resourcebase...” 
Economic Insights
- April 3, 2013
There’s no reason to change our call that the Fed is on hold through mid-2015, but that call rests on a viewthat the end o QE will bring less stimulative rates at the long end (see pages 3-5). Frankly, we’re surprisedat how well long rates held in (or both the US, and by extension, Canada) given that our once top-o-consensus orecast or US Q1 growth is now a much more widely held view. European news is part o thatstory, and since we see a lingering impact rom those risks, and US growth will slow towards mid-year, we’vepushed o most o our projected bond market sell o until late this year.The changing o the guard at the Bank o Canada isn’t likely to alter its stand-pat stance, particularly withhousehold credit growth in check. We’ve slowed the path ahead or 2-year rates as we’ve chipped ourorecast or growth slightly downward, but are in agreement with the Bank that its next move, well o inH2 2014 or even early 2015, will be a hike not a cut.Having moved more than hal way there, dollar-Canada pulled back rom our June 1.05 target. But we’resticking to our guns on that call, expecting sotness in global growth to take some o the shine o ourcommodities-linked currency. We remain bulls on the US dollar overall, see the euro vulnerable to politicaland banking developments, and the Aussie dollar to lower rates and resource price sotness.
2013 2013 2014END OF PERIOD: 2-Apr Jun Sep Dec Mar Jun Sep DecCDA
Overnight target rate 1.00 1.00 1.00 1.00 1.00 1.00 1.25 1.5098-Day Treasury Bills 0.96 0.95 0.95 0.95 0.95 1.10 1.30 1.602-Year Gov't Bond 1.00 1.10 1.20 1.45 1.55 1.70 2.00 2.2010-Year Gov't Bond 1.87 2.00 2.10 2.40 2.55 2.70 2.80 2.8530-Year Gov't Bond 2.51 2.60 2.70 2.90 3.00 3.05 3.10 3.15
Federal Funds Rate 0.16 0.10 0.10 0.10 0.10 0.10 0.10 0.1091-Day Treasury Bills 0.07 0.10 0.15 0.15 0.15 0.15 0.15 0.152-Year Gov't Note 0.24 0.30 0.35 0.45 0.45 0.60 0.80 1.1010-Year Gov't Note 1.86 2.00 2.15 2.45 2.60 2.70 2.75 2.8030-Year Gov't Bond 3.10 3.20 3.35 3.60 3.70 3.75 3.80 3.90Canada - US T-Bill Spread 0.90 0.85 0.80 0.80 0.80 0.95 1.15 1.45Canada - US 10-Year Bond Spread 0.01 0.00 -0.05 -0.05 -0.05 0.00 0.05 0.05Canada Yield Curve (30-Year 2-Year) 1.51 1.50 1.50 1.45 1.45 1.35 1.10 0.95US Yield Curve (30-Year 2-Year) 2.86 2.90 3.00 3.15 3.25 3.15 3.00 2.80
CADUSD 0.99 0.95 0.96 0.97 0.99 1.02 1.04 1.02USDCAD 1.01 1.05 1.04 1.03 1.01 0.98 0.96 0.98USDJPY 93 96 95 94 93 92 91 90EURUSD 1.28 1.27 1.25 1.28 1.28 1.30 1.31 1.32GBPUSD 1.51 1.47 1.45 1.49 1.50 1.53 1.55 1.57 AUDUSD 1.05 0.99 0.96 0.99 1.01 1.03 1.04 1.06USDCHF 0.95 0.96 0.98 0.96 0.97 0.96 0.95 0.97USDBRL 2.02 1.92 1.93 1.95 1.94 1.97 2.01 2.05USDMXN 12.28 12.64 12.66 12.75 12.82 12.88 12.95 12.95
Economic Insights
- April 3, 2013
Go Ahead, Fight the Fed
Avery Sheneld and Emanuella Enenajor
Last year, xed income investors rode Ben Bernanke’scoattails towards surprisingly strong returns. That wastrue not only or the US Treasury and mortgage bondsthe Fed was buying, but given their correlation to theAmerican market, Canadian bonds as well. But as wemove closer to the signicant acceleration in growth weexpect in the US or 2014, investors need to think abouttheir own exit strategy beore the Fed starts its.For a number o reasons, it’s time to go ahead and ghtthe Fed, and sell what the central bank is buying. It mightnot be possible or American central bankers to live up totheir simultaneous pledges or what they will do aboutthe unds rate and their bloated balance sheet. What theFed says today about its exit strategy may simply not beoptimal or it to pursue when the time comes to beginunwinding its extraordinary stimulus, and the marketcould begin to recognize that issue beore this year isout.
How Patient on the Funds Rate?
For now, there’s little reason to believe that the Fed hasits nger on the rate hike trigger. Infation is tame, labourmarkets still have ample slack, and the optimal undsrate today might well be negative, i that were possible.With one dissenting vote, the central bank is pledging toleave rates near zero until the jobless rate hits 6.5% orinfation looks to persist about 2.5%, both quite distanttargets.While that type o orward guidance was unusual, we’vebeen down this road beore, on the other side o the 49
 parallel. Mark Carney’s team at the Bank o Canada wasalso acing the zero bound in the overnight rate backin 2009, and a market that was stubbornly pricing inrate hikes a ew quarters ahead. To fatten the curve itissued a “conditional commitment,” pledging that ratehikes would be eschewed until ater the second quartero 2010, as long at the economy tracked the Bank’sorecast.At least one key Fed player, Janet Yellen, has suggestedthat the FOMC is going urther than the Bank o Canadain a material way. Carney’s team was simply describing itsview on the orecast and the rate outlook that would beconsistent with it. Yellen argues that the Fed is actuallycommitting to hold rates lower or longer than it wouldideally. Unable to set the unds rate at the optimal leveltoday, which would be negative, the Fed promises tohold it lower than the typical Taylor Rule ormula wouldimply in the uture (Chart 1). As a result, two-year ratestoday trade as i the unds rate was instead starting romnegative.But promises can be hard or central banks to keep. Eventhe Bank o Canada, acing rmer-than-expected growthand infation, ended up raising rates one meeting earlierthan its conditional pledge would have allowed.
Chart 1
Fed Strategy: Pledge to Over-Stimulate In Future
Source: Federal Reserve
Chart 2
6% Joblessness Was Consistentwith Fed Funds Rate at 1%
Source: Haver Analytics, CIBC 
0%2%4%6%8%10%12%Sep-1996Jun-2000Mar-2004Dec-2007Sep-2011UnemploymentRateFed FundsTarget RateFF Rate @ 1%with 6% joblessness
0%1%2%3%4%5%2011 Q12013 Q22015 Q32017 Q4Modified Taylor RuleBaseline (primary dealer survey)Optimal PolicyFed Funds Rate

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