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DIVISION OF INTER^ATJONALJLMWUblCE-—- • i ; BOARD OF OOVERNORS OF THE H. 13 No. M l June 23, 1965. CAPITAL, MARKET DEVELOPMENTS ABROAD I. II. III. I. Canada Nine Charts on Financial Markets Abroad Latest Figures Plotted in H. 13 Chart Series, 1965 Canada: Money and Capital Markets, March-June 1965 Conditions in Canadian money and capital markets tigthened between March and June. Between March 25 and June 17, Treasury bill yields advanced by 36 basis points, day-to-day loans by 70 basis points, 3-year bonds by 23 (See Table 1.) During basis points and long-term bonds by 4 to 8 basis points. this period, the index of industrial stocks declined by about 1 per cent. Table 1. Canada: Level as of: March 25 Interest Rates (% p. a. ) 3-month Treasury bill a/ Day-to-day loans b/ Government bonds: c/ 5% 1968 4.25% 1972 4.5% 1983 5.25% 1990 Stock Index d/ Canadian dollar Spot (U.S. cents) 3-month forward premium a/ b/ c/ d/ e/ Selected Financial Market Indicators, March-June 1965 Change from previous date to: Apr. 8 May 20 Jun. 3 Jun. 10 Level as of: Jun. 10 Jun. 1 3.62 3.35 -.01 +.03 40. 22 +0.40 + .14 + . 13 0.00 -. 10 3.96 3.88 3. 98 4.05 4. 70 4. 97 5.09 5. 12 -.07 -.06 -.04 -.03 +0.06 40.03 +0.04 40.02 +0.15 40. 10 40.09 +0.06 -.04 -.01 -.02 -.01 4.81 5.03 5. 14 5. 15 4.93 5.12 5.17 5. 16 206. 1 -1.0 92.32 +.32 +0.01 -.19 -.11 -.14 -0. 27 +.07 +.0 7 . 61 ef -6.0 203.8 92. 37 .41 92.39 . 54 Average tender. Average of daily closing rates for week ending preceding Wednesday. Wednesday data; mid-market yield at close. From Financial Post. As of June 3. The increasing strain in short-term credit markets reflected the more restrictive monetary policy of the Canadian authorities. During the period under review, bank loans rose sharply and the money supply increased at an annual rate of about 16 per cent. (See Table 5.) The tightening bank liquidity took the form OFFICIAL USE ONLY (Decontrolled after six months) OFFICIAL USE ONLY - 2 - of a drop in the liquid asset ratios of the chartered banks from 16.93 per cent on March 24 to 16.35 per cent on June 9; the ratio of government securities and similar "more liquid" longer term assets dropped from 32.1 per cent to 30.8 per cent. (See Table 5.) Canadian sources also tended to attribute the tighter credit conditions to the withdrawal of U.S. funds from Canadian markets as a result of the U.S. voluntary credit control program. Indeed, Canadian banks did experience substantial withdrawals of U.S. resident deposits. Officials of a Canadian finance house (the Atlantic Acceptance Corporation), which failed in June, attributed the company's inability to meet its maturing obligations to the shortage of U.S. funds in Canada. From the monthly statements of the Canadian banks, it appears that their foreign (non-Canadian) currency deposits fell $637 million from the end of February to the end of April. The banks offset these losses mostly by reducing deposits with banks abroad (thought to be mostly banks in London) by about $500 million and by cutting their call and other short loans by nearly $180 million. (See Table 9.) By contrast, their longer-term loans were, not significantly reduced. Thus, it would appear that Canadian banks reacted to losses of U.S. dollar deposits by reducing their assets outside Canada. That the banks have not been employing U.S. dollar deposits as Canadian dollar funds is suggested by the fact that their foreign currency assets have exceeded their corresponding liabilities by $60 to $75 million. (See Table 9.) But the withdrawal of U.S. funds has directly affected the Canadian finance paper market, where rates increased substantially during the period under review. The covered yield differential in favor of Canadian over U.S. finance paper has ranged between 63 and 92 basis points. (See Table 10.) With some repatriation of U.S. funds and--more important--the weakening in Canada's trade balance, the ppot Canadian dollar has weakened steadily since early May. At the same time, the premium on the forward dollar widened appreciably even though Canadian money market rates rose above those in the U. S. Money markets tighter. Money market rates, which had been falling gradually since the early part of this year, began to rise in late March and early April. Between April 8 and June 17, the Treasury bill market rate rose 37 basis points; the call money rate rose 67 basis points; finance paper rates rose 25 points; and commercial paper rates rose 42 points. (See Table 2 and Charts 2 and 5,) OFFICIAL USE ONLY - 3 - OFFICIAL USE ONLY Table 2. Canada: Money Market Rates, March-June 1965 (per cent) May 13 May 27 June 3 June 17 3. 77 3.82 3.87 3.93 3. 98 3. 38 3.80 3. 78 3. 75 3.98 4.05 4.38 4.38 4.50 4.50 4.63 4.63 4.63 4.06 4.06 4. 31 4.31 4.44 4. 50 4.38 March 25 A£ril 8 Treasury-bills 90-day 3.65 3.61 Day-to-day loans a/ 3.35 Prime Finance Paper b/ 90-day Prime Commercial Paper c/ 30-day a/ b/ _c/ April 29 Average of daily closing rates for week ending Wednesday. Friday data. Friday data; mid-range. Bond yields also turn up. This marked tightening of the short-term market spilled over into the medium-and long—end of the market, particularly towards the end of May. Between May 20 and June 17, increases in market yields ranged from 24 basis points for 3-year government bonds (to a level of 4. 93 per cent) to 5 basis points for 25-year bonds (to a level of 5.16 per cent). (See Table 3.) As a result, yield differentials between U.S. and Canadian securities widened significantly: for example, the differential on 3-year obligations increased 28 basis points and that on 19-year obligations 9 basis points during the period under review. (See Table 3.) Municipal, provincial, and private bond yields also increased during May, though to a lesser extent than on central government paper. The McLeod 40-bond yield average rose 11 basis points (to 5.52 per cent) from March 1 to May 31; the biggest increases were in public utilities and industrial bonds, which rose 15 and 14 basis points, respectively, in this period. (See Table 4.) Money supply and bank credit continue to expand. The increases in money market rates and bond yields have developed in the face of a continuing and striking increase in the money supply. (See Table 5.) Since January of this year, the money supply (seasonally adjusted) has been increasing steadily at an annual rate of approximately 16.5 per cent. OFFICIAL USE ONLY OFFICIAL USE ONLY - 4 - Table 3. Canada/U.S. Comparative Bond Yields, 1965 (% per annum; Wednesday data; Canadian bonds, mid-market, yield at close; U.S. bonds, yields on bid side) June March 31 April 28 19 May 26 3. 93 2 16 Less than 1 year: U.S. 11/65, 4.0% Can. 9/65, 3.75% Differential (+ in favor Can,) 3. 95 3. 72 3. 94 3.74 3.93 3. 70 -.23 -.20 -.23 3-year: U.S. 8/68, 3.75% Can. 10/68, 5.0% Differential 4.12 4.67 +.55 4.13 4.62 +.49 4.12 4.69 +.57 4.11 4.81 +. 70 4.12 4.85 +. 73 4.10 4.93 +.83 7-year: U.S. 8/72, 4.0% Can. 9/72, 4.25% Differential 4.17 4. 95 +. 78 4.17 4.89 +. 72 4.17 4.94 +. 77 4.18 5.00 +.82 4.19 5.04 +.85 4.17 5.12 +. 95 19-year: U.S. 78-83, 3.25% Can. 9/83, 4.5% Differential 4.14 5.06 +.92 4.15 5.04 +.89 4.15 5.09 +. 94 4.15 5.14 +. 99 4.16 5.16 +1.00 4.16 5.17 +1.01 25-year: U.S. 2/90, 3.5% Can. 5/90, 5.25% Differential 4.17 5.09 +. 92 4.17 5.09 +. 92 4.17 5. 11 +. 94 4.18 5.15 +.97 4.19 5.16 +.97 4.18 5.16 +. 98 Table 4. 10 10 10 10 40 Canada: Provincials Municipals Public Utilities Industrials Bond Yield Average Source: -- March 1 April 1 April 30 May 31 5. 39 5.50 5. 37 5. 38 5.41 5.55 5.46 5.50 5.37 5.58 5.48 5.50 5.44 5.59 5.52 5.52 5.41 5.48 5.48 5.52 OFFICIAL USE ONLY 3. 91 -- -- Municipal., Provincial and Private Bond Yields (% per annum) McLeod, Young, Weir. -- 3.96 - 5 j OFFICIAL USE ONLY Table 5. Canada: Chartered Banks, 1965 (millions of dollars) January 27 Money supply not seasonally adjusted: a/ 2,059 Currency outside banks Deposits held by general public 15,004 Total seasonally adjusted: b/ Currency outside banks Deposits held by general public Total General loans (millions .of dollars) Cash-Ratio Liquid-asset Ratio More-liquid asset ratio cj a/ b/ cf February 24 March 31 * April 28 2,062 2,,170 2,122 May 26 2,123 15,037 15,,625 15,932 15,758 17,064 17,098 17,,795 18,054 17,882 3,702 3,770 3, 896 3,969 13,505 13,637 13, 769 13,952 -- 17,207 17,407 17, 665 17,921 ~~ March 24 April 14 May 5 May 26 8,374 8.07 16. 93 32. 1 8,502 8.04 16.86 31.6 8,624 8.07 16.83 31. 7 8,710 8.06 16.89 31. 7 June 2 June 9 8,858 8.13 16. 69 30.8 8,901 8. 10 16.35 30.8 As of date shown. Average of Wednesdays during month ending with date shown. "More liquid" assets as percentage of total assets. Since the beginning of 1965, general loans have continued to expand at a slightly slower pace than during 1964--about 12 per cent compared to 16 per cent per year. On May 26, they reached a level of $8,710 million, up 1.9 per cent from April 28, and up 4.0 per cent from March 24. However, there was little change in the cash or liquid assets position of the banks prior to May 26. Until that time, the cash ratio fluctuated between about 8.04 and 8.08 per cent and the liquid-asset ratio fluctuated between about 16.83 and 16.93 per cent. However, the liquid-asset ratio fell markedly to 16.69 on June 2 and 16.35 on June 9. The more-liquid asset ratio (the ratio of government securities and other moreliquid assets to t'nl assets) has fluctuated around a falling trend, declining from 32.1 on March 24 to 30.8 on June 9. OFFICIAL USE ONLY OFFICIAL USE ONLY 6 - - Bank of Canada increases its holdings of government paper. The chartered banks have financed their expansion of general loans by the sale of government paper to the general public and the Bank of Canada. Sales totalled $162 million in the 11 weeks ending May 26. (See Table 6.) Table 6. Canada: Holdings of Central Government Direct and Guaranteed Debt,1965 (par values; millions of dollars) Level as of March 24 Chartered Banks Treasury bills Other Total Bank of Canada Treasury bills Other Total General Public Treasury bills Can. Savings bonds Other Total Change outside gov't account Treasury bills Can. Savings bonds Other Total 1,333 2,502 Mar. 24Apr. 21 Changes Apr. 21May 19 May 19June 9 1,246 2,432 -39 , Level as of June 9 -10 3,835 - 87 -49 - 26 3,678 489 2,516 - 79 + 96 +37 +33 + 35 + 76 483 2,721 3,005 + 17 +70 +111 3,204 306 5,569 7,213 + 76 - 30 -115 +15 -52 -45 - 5 - 26 - 57 391 5,459 6,992 13,088 - 69 -82 - 88 12,842 - 14 - 30 - 95 +13 -52 -139 -61 -22 - 26 + 31 9 -1108 - 86 - 203 The central bank, as it did during the summer months of 1964, has made its purchases of government debt from the banking sector at gently falling prices. This policy has placed some restraining pressure on the expansion of bank credit, because it has made continued use of this source of credit expansion increasingly less attractive. Moreover, the sale of government debt by the banks has kept a downward pressure on both their liquid asset and "more liquid asset" ratios, which further restrains their loan expansion. Purchases of long-term government debt by the Bank of Canada from the general public and government accounts were particularly heavy during the period under review. Between March 24 and June 9, purchases of medium- and long-term OFFICIAL USE ONLY OFFICIAL USE ONLY - 7 - central government debt totalled $205 million. These have contributed to moderate the rise of long-term market yields. Such moderation was probably desired in order: (1) to cushion the impact of the rising cost of finance on the current Canadian expansion, and (2) to prevent an appreciable widening of long-yield differentials on comparable U.S.-Canadian obligations which might encourage Canadian municipal and provincial governments to make increasing use of U. S. capital markets. Foreign trade position weakens in March. Preliminary estimates of the Canadian balance of payments for the first quarter of 1965 suggests a current account deficit of approximately $500 million, unadjusted for seasonality. . However, official figures are not yet available. Preliminary figures for merchandise trade indicate a small surplus of $31.5 million for the quarter (seasonally adjusted), but this includes a marked deterioration in March, as merchandise imports increased much faster than exports. In fact, imports (seasonally adjusted) have risen more strongly in 1965 than during the same period in 1964. (See Table 7.) Table 7. Canada: Foreign Trade Position, January-March 1965 (millions of dollars) January Merchandise Trade, seasonally adjusted Exports a/ Imports b/ Difference a/ b/ py 654. 1 f/647. 7 jV +6.4 Percentage Change 196319641964 1965 IV/1 IV/1 February 687.8 £/662.2 2/4-25.6 704.0 2/704. 5 2/ -0.5 4.3 5. 1 1.2 5.8 Including re-exports; valued f.o.b. Valued c.i.f. Preliminary figures. Reserves still on downward trend During the first quarter, official reserves declined $(U.S.)114.1 million. (See Table 8.) Part of this loss was offset by drawings of Canadian dollars from the I.M.F. in amounts totalling $(U.S.)42.5 million. Moreover, the latest figures for April and May show a slight improvement in the reserve position, if Canada's position in the I.M.F. is taken into account. There was a net drawing of Canadian dollars from the Fund in April, which augments the small official increase shown in Table 8. The apparent loss of $67.8 million in May was more than offset by a U.K. drawing from the Fund of $72.5 million in Canadian dollars. OFFICIAL USE ONLY OFFICIAL USE ONLY Table 8. 8 - - Canada: Official Reserves, January-May 1965 (millions of U.S. dollars) January Gold U.S. dollars Total Net drawings of Canadian dollars from I.M.F. Gold as percentage of of total reserves February March April May 1036.0 1632.2 1040.6 1608.1 1044.1 1510.0 1044.7 1521.8 1081.4 1417. 3 2668.2 2648.7 2554.1 2566.5 2498.7 0.0 15.0 27.5 5.0 72.5 38.8 39.3 40.9 40. 7 43.2 Chartered banks lose foreign currency deposits. Since February, there has been a large decline in foreign currency deposits in Canadian banks. (See Table 9.) Deposits fell $636.9 million (from $5372.7 million at the end of February to $4735,8 million at the end of April). Canadian banks met this large withdrawal by adjusting their assets Between January and April, abroad and not by changing their assets in Canada. they reduced deposits with foreign banks by $497 million (including deposits with U.K. banks and with U.K. local authorities) and their call and other short-term loans by $174 million. By contrast, their longer-term loans and other assets actually rose. (See Table 9.) Table 9. Canadian Chartered Banks: Foreign Assets and Liabilities, 1965 (end of month; millions of dollars) January I, February March April Change Jan.-April Assets Deposits with other banks Securities Call loans and other short loans Other loans Total 1671.6 654.4 1650.4 664. 1 1417. 2 603.8 1174. 6 636.5 -497.0 -17.9 1034.5 2051.3 5411.8 1041.3 2094.2 5450.0 823.7 2136.6 4981.3 859.6 2126. 1 4796.8 -174.9 +74.8 -615.0 II. Liabilities (total) 5336.2 5372.7 4903.3 4735.8 -600.4 III. Net position (1-II) 75.6 77. 3 78.0 61.0 -14. 6 Source: Monthly supplement to Canada Gazette. OFFICIAL USE ONLY - 9 - OFFICIAL USE ONLY Spot rate moves down; forward premium rises. The Canadian spot dollar, after increasing from 93.32 U.S. cents on March 25 to a high of 92.76 cents on April 15, has eased steadily to below the 92.50 cent par. (See Table 10.) By June 10, the spot rate reached a low of 92.37 cents. However, it rose to 92.39 cents on June 17. The decline may reflect Canada's deficit on foreign current account. Table 10. Canada/U.S. Exchange Rates and Arbitrage C..--uation?, 1965 As of: March 25 Exchange rates Spot (U. S. cents) Forward premium on Canadian dollar 3-month yields and differentials (% p.a.) Treasury bills Canada (covered) U. S. Differential (covered) (+ favors Canada) Finance paper a/ Canada (covered) U« S. Differential (+ favors Canada) a/ June 29 May 13 92.76 92. 70 92.62 92.37 92.39 . 61 .47 .30 .20 .41 .54 4. 18 3.89 4.01 3. 91 3.98 3. 90 3.93 3.88 4.24 3. 79 4.43 3. 77 +.29 +. 10 +.08 +.05 .45 +. 66 5.04 4.25 4. 97 4.25 4.90 4. 25 4.88 4.25 5.04 4. 25 5. 17 4. 25 +. 79 +. 72 +. 65 +. 63 +. 79 +.92 92.32 April 15 10 17 Following Friday data. The forward premium on the Canadian dollar had fallen throughout the period under review, until late May and early June, when it showed a strong rise of 34 basis points to 0,54 per cent between May 13 and June 17. (See Table 10.) Covered differentials on comparable Canadian-U.S. obligations have generally followed movements in the forward premium. The covered interest differential on Treasury bills in favor of Canada declined through mid-May, as the fall in the forward premium was only partially offset by the rise in the Canadian bill rate. In the second half of May, however, as both the bill rate and the forward premium rose, there was a significant widening of the differential. This reached a level of 66 points on June 17. The covered differential on 3-month prime financial paper has shown a similar movement, reaching a level of 92 points nn June 18. OFFICIAL USE ONLY INTERNATIONAL MONEY M A R K E T Y I E L D S FOR U . S . D O L L A R I N V E S T O R S 3 - M O N T H EURO-DOLLAR DEPOSIT VS. CERTIFICATE OF DEPOSIT 1 1 T * I / v v 1 - 11 * — ' r l i J r 1 — 1 | J 11 A - J I r * U.S. CERTIFICATE OF •(POSIT - 1 — | EURO $. CERTI v ' A ' X d\ 1 OVER | >F D E P O S I T J r * T \ 1 1 1 1 1 1 1 1 1 11 1 1 1 SELECTED I N T E R N A T I O N A L M O N E Y RATES Friday figures EURO-DOLLAR DEPOSIT RATES ( L O N D O N ) - w r COMMERCIAL I PAPER-Fully I « . * . HIKE PURCHASE Hedged I III. ••I. 11 11 INTEREST A R B I T R A G E , U N I T E D STATES / C A N A D A Friday f i g u r • i * 3 - M O N T H TREASURY BILL RATES UNITII STATES I I I I I I I I I I BILL RATE DIFFERENTIAL A N D F O R W A R D C A N A D I A N DOLLAR SPIEAD IN FAVOt OF CANADA W I "Z F O W I A R B R A T E -3 - 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 ( N E T I N C E N T I V E S ) rllME FINANCE PAPEt FAVOt «. * FAVOI CANADA i ii ii J ii S ii D ii M Mil Thuridoy figurei 1962, Friday I hereafter. ii J IfiJ i ii • i i I i i i i I i i I i i J $ # 11*4 ill J 1lt$ Y $ I INTEREST A R B I T R A G E , N E W Y O R K / L O N D O N Friday figures 3 . M O N T H T R E A S U R Y BILL RATES RATE D I F F E R E N T I A L A N D 3 - M O N T H FORWARD STERLING' RAT 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 N T I K I S T A t i l T R A O I FOR O I R M A N C O M M K R C I A L B A N K * Friday l l g u r v i i i i r 1 1 1 1 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 r h "VV^ r I I 1 I I 1 I 1 I 1 I 1 1 I I 1 I I I I I I I I I I I I I I I I I I I I 0 H l 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 F O I W A K D IATI | -v | TMASUIV m i s 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 FAV01 Of FlANIFtllT | \r^\ '/ V I I I l M I L 11 AMI 10 AN IATI kVv't 'A 4 X A V r ~ A / / V — / V \ SHORT-TERM INTEREST R A T E S # | CANAIA 1H4 3 monlh treoiury bill ralei for all covnlriei except Japan and Switzerland (3 monlh deposit roll) ~t° 3 month role for U S dollar depoiili in London. (Average rate on bank loam and diicounlt) Chart 4 L O N O - T i a w B O N D YI1LDS IMS Chart 7 I N D U S T R I A L STOCK I N D I C E S t e l l e icele JAfAN V". 1**2 Swin ftonk Corporation induilriol Hock. 114$ X SPOT I X C H A N O I R A T I S - M A J O R C U R R I N C I 1 S A O A I N S T U.S. D O L L A R ' i.e 1.4 1.1 U.K. S 1 I I I I N 8 BELGIAN flANC /x CANADIAN e O t U l 3-MONTH FORWARD Friday figures E X C H A N G E RATES AGAINST U.S. D O L L A R S AGAINST POUND STERLING - LONDON AGAINST POUND STERLING - LONDON V , !L 13 No: 201 June 23, 1965 III. Latest Figures Plotted In H.13 Chart Series, 1965 Per cent per annum Chart 1 Upper panel (Wednesday, June 16 (Friday, June 18 , except as noted) ) Euro-$ deposit 5.06 U.S. certif. of deposit 4.30 Treasury (Friday, june ) ]R Call 4.38 7-day 4. 50 30-day 4.88 90-day 5.00 180-day 5. 12 Finance Co. paper: Hire-purchase paper, U.K. 5.42 Germany 3,12 i Swiss 3-month deposits (Date: May 15 ) Euro-$ deposit (London) Japan: composite rate * (Date: April 30 ) • 5j_22_ 3.44 00 7.921 Chart 6 4. 72 Bonds: Chart 2 (Friday, LJ2. U.K. Canada U.S. Canada bills: U.S. Lower panels Euro-$ deposits: Per cent per annum Chart 5 June 18 Treasury bills: U.S. govt. (Wed. June 16 ) Canada 3JLL U.S. 3. 77 Spread favor Canada +0. 10 Forward Canadian dollar +0,47 Net incentive (Canada +) +0,57 Chart 3 (Friday, June 18 Treasury bills: ) U.K. 5A2_ U.S. 3^Z2. Spread favor U. K. +L65 Forward pound -1.96 Net incentive (U.K. +) -0. 31 ) U.K. war loan (Thurs. , June 17 4. 18 W 2 . German Fed. Railway (Fri. , June 18 ) 6^8SL Swiss Confederation (Fri. June 11 ) 3_£L Canadian govt. (Wed. , June 16 ) 5_i_LZ_ Netherlands government perpetual (Fri. , June 11 ) * Additional rate: (March 26 5. 31 7. 942 For description and sources of data see special annex to H. 13 Number 164, for September FRASER 23, 1964. Digitized
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