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DIVISION OF INTERNATIONAL FINANCE BOARD OF OOVERNOlt* FEDERAL RESERVE S Y S T E M August 4, 1965 CAPITAL MARKET DEVELOPMENTS ABROAD I. II. III. Canada: Canada Nine Charts on Financial Markets Abroad Latest Figures Plotted in H. 13 Chart Series Money and Capital Markets, June-July 1965 Credit conditions in Canada tightened further in July, after easing somewhat in late June. (See Table 1.) Between July 1 and 29, yields on government bonds increased by 9 to 14 basis points, and the Treasury bill rate rose 12 basis points. In the foreign exchange market, the spot Canadian dollar fell gradually between mid-June and mid-July, to 92.19 (U.S. cents)^ but subsequently rose sharply to 92.51 (U.S. cents) by month's end; reportedly on strong commercial demand. The forward dollar changed gradually from a premium of 54 basis points on June 17 to a discount of 14 basis points on July 29. Table 1. Canada: Selected Financial Market Indicators, June-July 1965 A. Interest rates 3-month Treasury bills a/ Day-to-day loans b/ Government bonds:"c/ 5.0%. 1968 4.25% 1972 4.5% 1983 5.25% 1990 B. Stock index d/ Canadian dollar Spot lU/S. cents) 3-month forward premium a/ b/ c/ d/ e/ 17 24 3. 98 4.05 3.94 3.60 3. 93 3.48 4.93 5.12 5.17 5.16 4.89 4.89 5.12 5.10 5 . 1 6 ' 5.15 5.13 5. 14 200. 6 198. 6 1 193. 9 15 22 29 3.97 3.47 3.97 3. 78 3. 9S 3.80 4. 05 3. 98 4.95 5.19 5.23 5.20 5.04 5.23 5.27 5.25 4. 98 5.21 5.26 5.23 4.98 5.25 5.30 5 u 27 8 192.0 189.8 185.6 92. 39 e/ 92. 37 -92.31 92.25 92.19 92. 30 92.51 .54 e/ - .27 .27 .14 . 14 -.14 .54 Average tender. Average of daily closing rates for week ending preceding Wednesday, Wednesday data; mid-market yield at close. From Financial Post, (1958=100). As of July 2. July 1 was a holiday. n.a. — OFFICIAL USE ONLY (Decontrolled after six months) OFFICIAL USE ONLY 1he easier market ccnditirns of late June apparently resulted from official efiorts aimed at neutralizing the disruptive impact of the failure of the Atlantic Acceptance Corporation. On June 17 the A.A.C. (a medium--sized sales finance house)' went into receivership, having defaulted en a $5 million note on,June 14. According to the financial press, the Bank of'Canada assured the chartered banks that it would meet their needs for iucds for Lending to finance houses. In addition, some ,bartered banks lowered the fees they charge on banker's acceptances. By early July men ay market conditions became more settled and the La-iad: ar- authorities reverted to pursuit of the restrictive monetary policies, u ned at moderating an excessive pace of domestic economic e x p a : " U ^ , which had been initiated in early April. However, the aim of the jui.br rities in bringing about a necessary degree of money market tightness has probably been facilitated by the effects on credit string,rcy of the withdrawal of U.S. dollar deposits from Canada. The withdrawal has been quite large, totalling over $700 (Canadian) million in the three-month period through May 1965. (See Table 5.) Bank of Canada eases market conditions in June. After the failure of the Atlantic Acceptance Corporation in mid-June, the Bank of Canada reportedly assured the chartered banks that enough money would be made available to allow them to lend to finance companies. Chartered bank loans to irsta:r'finance companies did, i n fact, rise considerably. (See Table 2.) From June 16 to July 21, loans outstanding rose from $280 mill ion to $377 million. By contrast, bank loans to finance companies averaged about $260 million in June and July, 1964, and about $248 million in June and July, 1963. Further expansion of loans in the month ending Tabie 2, Canada: Chartered Bank Indicators, (millions of dollars or per cent) Currency outside banks — / Chartered bank deposits , held by general public— Total a/ , General • f,r.vs b / Z.Oa': i to instalment finance 'companies b/ ay b/ c/ asset March Apr! 1 3,896 3,967 13,769 17,665 13,954 17,921 13,989 17,977 14,118 18,210 8,411 8,610 8,754 9,134 295 281 347 8.OS 16.92 16.77 288 ' Average cav.:: reserve ? atio^ Average Ilea id asset ratlah' 8.08 ^ 16.97 seasonal iy . a d j u s t e d ; end o r m o m n . End of month-. Daily average, minimum cash ratio is 8 per cent:, rati" is 16 per cent. 1965 OFFICIAL USE OM.Y June 3,98&^ 8, OS 4,092 8.09 16.39 minimum liquid OFFICIAL USE ONLY - 3 - July 21 is reflected in the increase in the money supply of $325 million from June 17 to July 21; by comparison, the money supply increased by only $46 million during the same period in 1964. Seasonally adjusted, the money supply increased 1.3 per cent in June 1965, compared with 0.3 per cent in May. (See Table 2.) Money market rates resume rise in July. Largely in response to the activities of the Bank of Canada, money market conditions eased in the latter part of June. (See Table 1.) The average tender rate on 3-month Treasury bills moved from 3.98 on June 17 to a low of 3.93 on July 1, and rates on day-to-day loans dropped from 4.05 to 3.48. Market conditions were further eased by the fact that some chartered banks lowered the fees they charge on banker's acceptances for the most credit-worthy borrowers, from a minimum of 1-1/4 per cent per annum to a minimum of 1/2 of 1 per cent. By encouraging some corporate borrowers to make use of the banker's acceptance, / the banks were in a better position to accommodate the borrowing needs of finance houses. Banker's acceptances have seldom been used in recent years, but non-financial corporate borrowers may find this instrument increasingly attractive as a form of short-term financing. No dataware available on the volume of banker's acceptances. However, market rates began to rise in early July and by the end of the month were back to their levels of mid-June. (See Table 1.) Chartered bank bond sales push yields upward. In an effort to maintain liquidity positions in the face of continued vigorous loan demand, the chartered banks have converted some of their long-term securities into Treasury bills. From June 16 to July 28, the chartered banks' holdings of securities fell by $103 million, from $2,444 million to $2,341 million. Their holdings of Treasury bills increased during that period by $87 million, from $1,229 million to $1,316 million. (See Table 3.) As a result of these sales, yields on Canadian bonds rose during the period under review. From June 16 to July 28, yields on 3-year bonds rose 5 points to 4.98; on 7-year bonds, yields rose 13 points to 5.25; on 19-year bonds, yields rose 13 points to 5.30; and on 25-year bonds, yields rose 11 points to 5.27. The increase since May 12 has been even greater. (See Table 4.) Given the stability of yields on comparable U.S. bonds, yield differentials, in favor of Canada, have also been increasing, with the differentia] exceeding 1 per cent oh all of the longer-term bonds throughout July. (See Table 4.) x OFFICIAL USE ONLY OFFICIAL USE ONLY Table 3. - 4 - Canada: Holdings of Central Government Direct and Guaranteed Debt, 1965 (par values; millions of dollars) Level as of: June 16 July 28 Bank of Canada Treasury bills Other Total Chartered banks Treasury bills Other Total General Public Treasury bills Canadian Savings bonds Other Total Source: Change 497 2,725 436 2,803 - 61 + 78 3,222 3,239 + 17 1,229 2,444 1,316 2,341 + 87 -103 3,673 3,65 7 - 16 393 5,449 6,976 367 5,395 6,998 - 26 - 54 + 22 12,817 12,760 - 58 Bank of Canada. Stock market declines steadily. Between June 17 and July 22, the Financial Post's index of total industrials fell 15 points--a decline of about 7-1/2 per cent. (See Table 1.) This decline is attributable in part to the movements on Wall Street, and the subsequent, less optimistic, prospects for continued U. S. prosperity. The Canadian financial press reports that the decline is also due, in some measure^ to the failure of the Atlantic Acceptance Corporation. Foreign deposits in chartered banks continue to fall. Foreign currency deposits in Canadian chartered banks fell by $72.9 million in May, bringing the total decrease in deposits in the three months ending May 31 to $709.8 million. (See Table 5.) As in previous months, the banks reacted by reducing their foreign currency assets. However, whereas in March and April they reduced primarily their call loans and deposits in foreign banks, in May - holdings of foreign securities were largely affected. (See Table 5.) This change probably represents a desire to achieve balance in their foreign pnrtfolin. OFFICIAL USE ONLY OFFICIAL USE ONLY Table 4. Canada/U.S. Comparative Bond Yields, 1965 (per cent per annum; Wednesday data; Canadian bonds; mid-market yield at close; U.S. bonds, yields on bid side) June May 12- _16 July 30 7 14 21 28 4 . 10 4 .98 4 . 10 4 . 98 -year: U.S. 8/68, 3. 75% Can. 10/68, 5.0% Differential (+ in favor Can.) 4.12 4.65 4. 10 4.93 4.07 4.89 4.OS 4.95 4 .10 5 .04 +.53 + .83 +.82 + .86 + .94 + .88 + .88 -year: U.S. 8/72, 4.0% Can. 9/72, 4.25% Differential 4. 17 4.92 +. 75 4.17 5. 12 + .95 4. 15 5. 12 +.97 4. 15 5. 19 +1.04 4 . 15 5 . 23 +1 .08 4 . 16 5,.21 +1,.05 4 . 16 5,. 25 +1 .09 9-year: U.S. 78-83, 3.25% Can. 9/83, 4.5% Differential 4.15 5.07 +. 92 4.16 5.17 +1.01 4. 16 5.15 +. 99 4.17 5.23 +1.06 4,. 17 5,.27 +1.. 10 4., 17 5.,26 +1.,09 4,. 18 5., 30 +1.. 12 j-year: U.S. 2/90, 3.5% Can. 5/90, 5.25% Differential 4. 17 5.09 +.92 4. 18 5. 16 + .98 4.17 5. 13 +. 96 4. 18 5.20 +1.02 4. 18 5. 25 +1. 07 4. 18 5. 23 +1. 05 4. 18 5. 27 +1. 09 Foreign reserve losses continue. Official holdings of gold and U.S. dollars declined by another $(U. S.)18. 6 million in June, after falling $(U.S.)67.8 million in May, bringing the total loss in the first half of 1965 to $(U.S.)194.2 million. (See Table 6.) As in previous months, this loss consisted entirely of U.S. dollars, with gold holdings continuing to rise. Since the first of the year, gold as a percentage of total official gold and dollar holdings rose from 38.4 per cent to 43.9 per cent in June. (See Table 6.) Foreign trade position remains weak. Canada's merchandise trade accounts showed continuing weakness through the first four months of 1965, compared to the same period last year, as export growth failed to match the rising trend of imports. (See Table 7.) OFFICIAL USE ONLY OFFICIAL USE ONLY Table 5. Canadian Chartered Banks: Foreign Assets and Liabilities, 1965 (millions of Canadian dollars) Level end of Jan. Level end of May Change during month of: AprMay Feb. I. Assets Deposits w/other banks Securities Call loans; other short loans Other loans Total 16 71, 6 654.4 -21. 2 + 9.7 -233.2 - 60.3 -242,6 + 32; 7 + 9.9 -100.3 1184.5 536.2 1034.5 2051.3 5411.8 + 6.8 +42.9 +38.2 -217.6 + 42.4 -468.7 + 35.9 - 10.5 -184.5 + 34. 7 - 24.0 - 79.7 894. 3 2102.1 4717. 1 II. Liabilities Deposits by banks Other deposits Total 945. 6 4390.6 5336.2 +34. 1 + 2.4 +36.5 - 14.1 -455.3 -469.4 + 60.3 -227.8 -167.5 - 17.1 - 55.8 - 72.9 1008.8 3654.1 4662.9 75. 6 + 1.7 + - 17.0 - III. Net position (I-II) Source: 0. 7 6.8 54. 2 Monthly supplement to Canada Gazette. Table 6. Canadian Official Holdings of Gold and U.S. Dollars, 1964-65 (millions of U.S. dollars) Level as o f Dec. '64 Dec. Mar. Change: 64Mar. 65 Jun. 1 1 1 1 65 65 Level as of Jun. '65 Gold 1025.7 + 18.4 + 45.0 1089.1 U. S. dollars 1648.6 - 138. 6 -119.0 1391.0 120.2 - 74.0 2480.1 Total 2674.3 Gold as percentage of total Source: 38.4 43.9 Bank of Canada, OFFICIAL USE ONLY OFFICIAL USE ONLY Table 7. - 7 - Canada: Merchandise Trade, 1964-1965 (millions of dollars) 1964 JanuaryApril JanuaryApril January February March April Not seasonally adjusted: Exports " Imports Balance 2453.7 2358.4 +95.3 2515.7 2545.7 -30.0 586.8 559.8 +27.0 557.3 555.0 +2.3 706.4 731.1 -24.7 665. 2 699.8 -34.6 Seasonally adjusted: Exports Imports Balance 2665.8 2500.0 +165.8 2761.1 2707.6 +53.5 654.1 647.7 +6.4 687.8 662.2 +25.6 704.0 704.5 -0.5 715.2 693. 2 +22.0 Source: 1965 Dominion Bureau of Statistics. Taking account of seasonal factors, Canada's trade surplus was reduced to $53.5 million in the January-April period this year, compared to $165.8 million for the same four months in 1964. (See Table 7.) Generally, Canada's merchandise trade receipts in 1965 are not expected to reach last year's high level because wheat sales to the Soviet bloc are likely to be much reduced in volume, and because continued Canadian domestic expansion will boost imports. Spot Canadian dollar strengthens in July. The spot Canadian dollar, which had been falling steadily since April, reached a low of 92.19 (U.S. cents) on July 15, reflecting to some extent the deterioration in Canada's trade balance. However in mid-July the rate began to strengthen, reportedly in response to an increase in commercial demand, and on July 29 reached 92.51 (U.S. cents). (See Table 8.) During the period under review there were also large rate movements in the forward market. Between June 17 and July 29, the forward Canadian dollar moved from a premium of 54 basis points to a discount of 14 basis points. (See Table 8.) The particularly large declines in the last two weeks of July might have been due to normal hedging operations as the spot rate moved up. Covered differentials on 3-month Treasury bills and finance paper followed movements in the forward dollar. From June 17 to July 29, covered differentials in favor of Canada narrowed from 0.66 to 0.01 per cent on Treasury bills, and from 1.03 to 0.48 per cent on finance paper. (See Table 8). OFFICIAL USE ONLY OFFICIAL USE ONLY Table 8. Canada/U,S. Exchange Rates and Arbitrage Calculations, 1965 As of: June 17 Exchange rates: Spot (U.S. cents) Forward premium on Canadian dollar 3-month yields and differentials (p.c. p.a.): Treasury bills Canada (covered) U.S. Differential (+ in favor Canada) Finance paper (p.c. p. a. ) : a/ Canada (covered) U.S. Differential a/ ~~2 July 15 92.39 92.31 92.19 92.51 .54 .27 .14 -.14 4.43 3. 77 4.10 3.80 4.05 3.84 3.79 3.78 + .66 +.30 +.21 .01 5.28 4.25 +1.03 4.95 4.25 +.70 4.95 4.25 +.70 4.73 4.25 +.48 Friday data. Europe and British Commonwealth Section. OFFICIAL USE ONLY J9~ Cktrl t I N T E R N A T I O N A L M O N E Y MARKET YIELDS FOR U.S. DOLLAR INVESTORS W«4it«tiiay j|| I J n - | yields I A*1 1 1 / " IDRO'DOIUI 61P0SI1 - J t1 / WIT" 11 1 J 11 - rf 1 I s — 1 U.S. CIITIMAT! Of MPOSIT - 1 . i i| EURO• D O l l A It OVER | 1. CIRTI PICATE <>P DEPOSIT y\ % J\ w 1 1 1 >\ I .1 1 1 1 1 1 1 1 , L 1 SELECTED I N T E R N A T I O N A L MONEY RATES Friday figures E U R O - D O L L A R DEPOSIT H A T E ! ( L O N D O N ) COMMERCIAL PAPS*-Fully I I O.K. H i l l PURCHASE U.S. FINANCE COEPANV H.d9.d I ' 'ill V I 1 1 1 1- INTEREST A R B I T R A G E , U N I T E D STATES / C A N AO A Friday f i g u r e i * 3 - M O N T H TREASURY BILL RATES BILL RATE DIFFERENTIAL A N D F OR WA RD C A N A D I A N DOLLAR ilSCOUNT M O N T H C O V E R E D RATE D I F F E R E N T I A L S (NET I N C E N T I V E S ) - M Thursday figures 1962, Friday thereafter. J I N T I R I S T ARBITRAGE, NEW Y O R K / L O N D O N Friday fi«wr«« 3 - M O N T H TREASURY BILL RATES RATE DIFFERENTIAL A N D 3 - M O N T H FORWARD STERLING' RAT DIFFERENTIAL WITH FORWARD EXCHANGE COVER (NET INCENTIVE) I* FAVOl or 10II0N I* FAV01 Of M « TOIl Ifil I N T E R E S T A R B I T R A G E FOR G E R M A N C O M M E R C I A L B A N K S Friday 11 g u r • « 3 - M O N T H TREASURY B I L L S , I N T E R B A N K L E N D I N G RATE A N D E U R O - D O L L A R D E P O S I T RATES | f X A 10All RATI 6IRMAN TRIASURY 1111$ i i i i i i i r RATE D I F F E R E N T I A L A N D F O R W A R D DEUTSCHE M A R K SPRIA* IN FAVOR OF FRANKFURT RATE D I F F E R E N T I A L W I T H F O R W A R D E X C H A N G E C O V E R (NET I N C E N T I V E ) I I IN FAVOR OF FRANKFURT I A i I I I I A INTIRIANK LOAN RATI K '/ • j $ mi • • J 1**4 L / / v $ v vt 1 I ' • A. J mi $ • Chor. 5 SHORT-TERM INTEREST R A T E S * IU10-I0UAI - 10NI0N t | V l -V^X J . . " NASA X -A rQp$. i d i v , l SWIT ZIKIAHI X Ll 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1,1 m i •X- 3.month Ireoivrv bill relet (or oil cownlriei t x end Swilxerlond (3-month deposit r o t ^ 3-mentK rote for U.S. dollor deposits in London 1 1 1 1 1 1 1 M 11*3 1 I 1 1 1 1 1 1 M 1144 111 1 I I 1 1 I I 1HS 1 H A . v \ Chert 4 L O N G - T E R M BONO Y I I L D S / V \ / J Vr S w i l l leek Cerperetlen industrial i l e t k . * " * Japan: Inde* of 223 industrial end elker Chart 1 SPOT I X C H A N O I R A T I S - M A J O R C U R R 1 N C 1 I S A G A I N S T U . S . DOLLAR 1 1 1 I 1 1 1 1 rtlNCH FIAWC i jY 1 1 1 1 1 1 1 v i y IU6IAN f K A N C K j » «•«. At 1 I x: - v - - W| DUTCH 6UIIBEI i 1 1 1 I I I I I I 1 1 1 1 1 1 1 1 i i i i i i 1 1 - A ITALIA R IIKA 1 ~ A L>' | 1 V-c^ T r - i s W IOIIAI \ A fVx/jV u -*1 , ,1 3 r - JAPAN!SI T i l I 1 • i i J 1 1 $ 1t« I 1 1 " 1 1 • J 19*4 i i $ i i 1 1 • • 1 1 J III! i i $ i i D VI 3 - M O N T H FORWARD I X C H A N O I RAT#* Friday figures A G A I N S T U.S. DOLLARS A G A I N S T POUND STERLING - L O N D O N A G A I N S T P OUND STERLING - L O N D O N H. 13 No. 207 August 4, 1965 Latest Figures Plotted In H. 13 Chart Series. 1965 Per cent per annum Chart 1 Upper panel (Wednesday, July 28 Chart 5 (Friday, July 30 , except as noted) ) Treasury Euro-$ deposit (Friday, July 30 Finance Co. paper: Call 7-day 30-day 90-day 180-day 4.063 4.125 4. 375 4,625 5.000 U.S. 4.25 Canada 4. 73 Hire-purchase paper, U.K. U 6 Swiss 3-month deposits (Date: July 15 )* 3^75. Euro-$ deposit (London) 4.62 Japan: composite rate (Date: April 30 ) 7. 921 Chart 6 Bonds: July 30 ) Canada 3.96 U.S. 3. 78 Spread favor Canada +0. 18 Forward Canadian dollar -0. 20 Net incentive (Canada +) -0.02 Chart 3 July 30 Treasury bills: 5.46 Canada 4. 72 Chart 2 (Friday, !_ZS_ U.K. Germany ) Euro-dollar deposits: U.S. 4.28 Lower panels Treasury bills: bills: 4.56 U.S. certif. of deposit (Friday, Per cent per annum ) U.K. 5.46 U.S. U.S. govt. (Wed. , July 28 4. 18 U.K. war loan (Thurs., July 29 6. 79 German Fed. Railway (Fri. , July 23 7.00 Swiss Confederation (Fri., July 23 3^2L Canadian govt. (Wed. July 28 5.30 Netherlands government perpetual (Fri. , July 23 5. 27 3. 78 Spread favor U.K. +1. 68 Forward pound -2.09 Net incentive (U.K. +) -0.41 For description and sources http://fraser.stlouisfed.org/ September 23, 1964. Federal Reserve Bank of St. Louis Additional rates: June 18 3.75 30 3.88 July 7 3.81 of data see special annex to H. 13 Number 164,
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