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Economy

Banks and investors face dilemma in meeting emissions target

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By Nichola Saminather

TORONTO (Reuters) – Canadian banks’ commitments to “net-zero financed emissions” by 2050 have drawn doubts from many investors, given the lack of a defined goal, details and their continued support for oil and gas companies, even if partially aimed at helping them transition to alternatives.

But their growing funding for green projects also presents a dilemma for shareholders who might want to divest.

The situation highlights the largely Canadian quandary faced by both the banks and their investors. Even in their quest to shrink financing for big emission-producers, the lenders cannot withdraw from an industry that accounts for about a tenth of the economy, despite its being responsible for over a quarter of emissions.

Over the past five months, Royal Bank of Canada (RBC), Toronto-Dominion Bank and Bank of Montreal, have announced plans to achieve net-zero emissions, but lacked details including a definition of that goal, interim reduction targets and plans to move away from traditional energy sources.

The six biggest banks account for nearly 90% of the industry’s revenues and move in tandem on strategic shifts, including climate initiatives, which leaves shareholders with few local alternatives.

“The challenge with the current push to divest banks because they’re involved in fossil fuels is that these are the very same banks critical to help meet many of our goals in alternative energy and sustainable financing,” said Jamie Bonham, director of corporate engagement at NEI Investments, which holds shares of the five banks.

Canadian banks’ outstanding loans to the oil and gas sector has stayed at the levels of two years ago, although it fell by 9.7% to C$47.5 billion ($42.2 billion) from a year earlier as of Jan. 31.

They remain some of the biggest financiers of fossil fuel producers globally, with TD the world’s top oil sands banker and RBC Canada‘s biggest financier of fossil fuels, in 2020, according to the Rainforest Action Network https://www.ran.org/wp-content/uploads/2021/03/Banking-on-Climate-Chaos-2021.pdf. RBC, TD and Bank of Nova Scotia were among the 12 worst banks for fossil fuel financing globally between 2016 and 2020.

Reports from the banks show none of the proceeds of green bonds they issued last year went to renewable projects by traditional energy companies.

(GRAPHIC – Global banks’ financing for fossil fuel companies: https://graphics.reuters.com/CANADA-BANKS/ENVIRONMENT/xegvbxzkkvq/chart.png)

LAGGARDS

Their reluctance to step away from financing fossil fuels makes them laggards compared to their global counterparts, particularly European ones like BNP Paribas https://www.reuters.com/article/us-bnp-paribas-shale-idUSKBN1CG0E3 and ING Groep that have distanced themselves from shale and/or tar-sands related oil and gas projects.

“When we set the net-zero target, that wasn’t, for us, about divestment,” said Andrea Barrack, TD’s global head of sustainability and corporate citizenship, in an interview with Reuters. “We’re a major corporation in a country where a lot of… people’s livelihoods depend on (the oil and gas) industry. We take those obligations seriously.”

TD’s 2021 ESG report, expected to be released next year, will include some interim goals, Barrack said.

For more details on how Canadian banks are approaching their net-zero emissions targets, see

Despite the dilemma, some investors are taking action.

Amelia Meister, senior campaigner at retail investor group SumOfUs, which represents about 1,700 retail shareholders of Canadian banks, said some members have divested their bank shares, and over 2,500 have said they will move their money from the banks to credit unions.

“We don’t necessarily know what their internal definitions for low carbon are,” Meister said. “Some define low carbon as light natural gas, which is still a fossil fuel.”

Others demand more transparency.

The banks should disclose milestones for achieving net zero emissions, including explicit criteria and timelines for withdrawing from activities not aligned with the Paris Agreement, said Emily DeMasi, senior engager for EOS, a stewardship service provider at Federated Hermes, representing investors who hold about C$3.3 billion of TD shares.

They should also show how they are incentivizing clients to reduce emissions, she said.

If they don’t move quickly enough, EOS could band together with other investors, file shareholder resolutions and vote to remove directors, DeMasi said.

None of the big Canadian banks has joined the Net-Zero Banking Alliance, which commits to finding pathways to net-zero emissions by 2050. VanCity, the biggest credit union, which has never financed fossil fuel companies, is the only Canadian financial institution in the alliance.

Banks globally face climate transition risks, said Jaime Ramos Martin, who manages Aviva Investors’ ESG funds.

“To be ahead on climate transition risks banks would need to transition their (portfolios) quicker than the economies where they are present,” Ramos Martin said. “Importantly, for us investors to follow up these efforts we need a great deal of disclosure, which currently is lacking.”

Meister blamed the banks for some of Canada‘s continued outsized reliance on traditional energy.

“Canadian banks dragging their heels has put our economy in a worse situation for the transition.”

 

(Reporting By Nichola Saminather; Editing by Denny Thomas and Dan Grebler)

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Economy

U.S. Dollar dips on improved risk appetite, traders eye jobs data

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By John McCrank

New York (Reuters) -The dollar dipped on Thursday, hitting its lowest point in three days, as global market risk appetite improved and traders looked forward to the April jobs report due on Friday for direction.

The number of Americans filing new claims for unemployment benefits fell below 500,000 last week for the first since the COVID-19 pandemic started more than a year ago, data showed, signalling the labor market recovery entered a new phase amid a booming economy.

The Dow Jones Industrial Average hit a record high, with financials and industrials rising following the jobless claims report.

While the U.S. economy has been gaining steam on the back of massive government stimulus and an improving health situation, Federal Reserve speakers on Wednesday downplayed the risks of higher inflation.

The U.S. dollar, which is regarded as a safehaven asset, declined against a basket of peer currencies and was last down 0.34% at 90.948.

“The outlook for the dollar by many right now that it’s going to be in the house of pain for quite some time,” because for the most part, the markets are convinced that the Fed has Treasury yields under control, said Edward Moya, senior market analyst at FX broker OANDA in New York.

Investors were looking forward to the closely watched non-farm payrolls report on Friday, with estimates of between 700,000 and more than 2 million jobs having been created in April.

If the number is north of 1.5 million, it could lead to a spike in Treasury yields that would provide some temporary support for the dollar, Moya said.

Elsewhere, the Bank of England said it would slow the pace of its bond-buying as it sharply increased its forecast for Britain’s economic growth this year after its coronavirus slump, but it stressed it was not tightening monetary policy.

“They said they are going to reduce the weekly pace of purchases, but that’s not a signal and so sterling has kind of gone up and down and done nothing at the end of the day,” said Erik Bregar, director and head of FX strategy at the Exchange Bank of Canada.

The pound was last down 0.15% against the weaker dollar at $1.3890 .

The euro was up 0.44% versus the dollar at $1.2058, and up 0.54% against the pound, at 0.8678 pence per euro.

Investors were also paying attention to elections in Scotland that could herald a political showdown over a new independence referendum.

The Canadian dollar hit a three-and-a-half year high against the greenback, helped by oil price gains and the Bank of Canada’s recent shift to more hawkish guidance.

“The Canadian dollar continues to have everything going for it fundamentally, technically, and if you look at intermarket correlations, so it’s been a tough trend to step in the way of,” said Bregar.

In cryptocurrencies, ether, the world’s second largest crypto currency after Bitcoin, hit a record high of $3,610.04.

Bitcoin declined 1.03% to $56,919.50.

The meme-based virtual currency Dogecoin soared on Wednesday to an all-time high, extending its 2021 rally to become the fourth-biggest digital coin.

(Reporting by John McCrank in New York; editing by Alistair Bell and Bernadette Baum)

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Economy

Canadian dollar seen consolidating gains as drumbeat builds for Fed taper

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Canadian dollar

By Fergal Smith

TORONTO (Reuters) – The Canadian dollar is expected to give back some of its recent gains over the coming year as the Bank of Canada‘s more hawkish stance is offset by potential dialing back of the U.S. Federal Reserve’s asset purchase program, a Reuters poll showed.

The median forecast of nearly 40 strategists in the May 3-5 poll was for the Canadian dollar to weaken 1% over the next three months to 1.24 per U.S. dollar, or 80.65 U.S. cents. It is then expected to trade at that same level in one year, compared to 1.23 seen in April’s poll.

“We think a lot of good news is in the price of the CAD, so we look for a little bit of tactical softening,” said Mazen Issa, senior FX strategist at TD Securities in New York.

The loonie has climbed 3.7% since the start of the year, the biggest gain among G10 currencies. On Wednesday, it touched its strongest intraday level since February 2018 at 1.2252.

The currency has been bolstered by higher prices for commodities such as oil, one of Canada‘s major exports, and an improved outlook for the domestic economy as the rollout of the COVID-19 vaccine gathers pace.

In addition, the Bank of Canada last month changed its guidance to show it could start raising its benchmark interest rate from a record low of 0.25% in late 2022. It also tapered its bond purchases, becoming the first major central bank to cut back on pandemic-era money-printing stimulus programs.

Analysts say the Federal Reserve could follow the BoC’s lead.

“We think that the odds are increasing that the Fed will have to acknowledge the strength in the U.S. economy and hint at a taper in late summer/early fall,” said George Davis, chief technical strategist at RBC Capital Markets.

“This would lead to a re-pricing in U.S. interest rate expectations that would be expected to boost the USD as the timing for U.S. rate hikes is brought forward.”

The U.S. central bank’s current guidance is to leave interest rates on hold until at least 2024.

Money markets expect two Bank of Canada rate hikes in 2022, as opposed to one from the Fed, reflecting the Canadian central bank’s more hawkish guidance, but past tightening cycles show that faster liftoff for the BoC may not be sustained.

“Things are not moving in isolation,” Issa said. “At the end of the day, FX is a relative game.”

(For other stories from the May Reuters foreign exchange poll:)

 

(Reporting by Fergal Smith; Polling by Sujith Pai and Nagamani L; Editing by Toby Chopra)

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Economy

Bank of England line up to taper emergency stimulus

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The Bank of England’s decision on Thursday to slow the pace of its bond-buying makes it the second central bank from a G7 economy to begin the slow exit from pandemic-era money-printing stimulus schemes.

The big three of central banking – the U.S. Federal Reserve, European Central Bank and the Bank of Japan – won’t officially pare stimulus for a while.

Yet there are growing signs that policymakers have their eyes on the exit as vaccine rollouts pick up and growth bounces back. The Bank of Canada‘s C$1 billion ($806 million) cut to its weekly bond-buying programme last month highlights the next phase is about slowing hefty asset purchases.

Bank of America estimates central bank asset purchases in the United States, Japan, the euro zone and Britain will slide to about $3.4 trillion this year from almost $9 trillion in 2020. For 2022, it predicts purchases of just $400 billion.

Here’s a look at who is tapering, who may raise interest rates and who might be the last to call time on pandemic-era monetary stimulus.

1/ NORWAY

Norges Bank is at the vanguard in terms of signalling a retreat, and said on Thursday it is on track to hike interest rates in the second half of 2021.

That has made the crown this year’s best performing G10 currency. The central bank doesn’t intervene in bond markets, so the taper debate is not applicable.

2/ CANADA

Having announced tapering, Canada has signalled that its key interest rate could rise from 0.25% late in 2022.

3/ BRITAIN

Flagging a stronger economic rebound, the BoE will slow bond-buying to 3.4 billion pounds ($4.7 billion) a week, from the 4.4 billion-pound current weekly pace.

However, it kept the total size of the bond-buying programme unchanged at 895 billion pounds and Governor Andrew Bailey said the move did not amount to tapering.

“Since the Bank has already purchased 70 billion pounds out of the 150 billion pounds in gilts to be purchased by the end of 2021, purchases were already set to naturally slow,” Ambrose Crofton, global market strategist at JPMorgan Asset Management, said.

 

For a graphic on British bond markets stable as BoE slows weekly bond buys:

https://fingfx.thomsonreuters.com/gfx/mkt/jbyvryljzpe/GB0605.png

 

4/ UNITED STATES

The Fed plans to keep borrowing costs near 0% and maintain monthly asset purchases worth $120 billion until it sees “substantial further progress” towards full employment and its 2% flexible inflation target.

But with the economy expected to grow by more than 6% this year and inflation to be a “little higher” – according to Fed boss Jerome Powell – markets are pricing in a rate rise in 2023. Many analysts expect tapering to start this year.

The Fed faces a delicate balancing act, ensuring that tapering at a time of massive U.S. government borrowing does not boost Treasury yields too much.

Pictet Wealth senior economist Thomas Costerg expects tapering to start by early 2022 and proceed at a monthly pace of $10 billion. That process would last about a year – “enough to keep expectations for the first rate hike well in the distance”, he added.

 

For a graphic on Central bank holdings of government bonds:

https://fingfx.thomsonreuters.com/gfx/mkt/yxmvjdwyevr/CBANKS2704.PNG

 

5/ SWEDEN

Swedish inflation is approaching the Riksbank’s 2% target but it has said interest rates would stay at 0% for years. However, its 700 billion crowns ($84 billion) asset purchase programme will wind down this year as planned.

6/ EURO ZONE

Anaemic long-term inflationary pressures mean euro area rates are unlikely to rise for years. But tapering may come sooner, especially within the European Central Bank‘s 1.85 trillion euro ($2.2 trillion) pandemic emergency purchase programme (PEPP).

Technically, this runs until March 2022 but some officials are already advocating reducing bond purchases as growth rebounds.

Danske Bank analysts reckon the ECB will end up using only 1.65 trillion euros of the total PEPP stimulus package.

 

For a graphic on ECB weekly PEPP purchases:

https://fingfx.thomsonreuters.com/gfx/mkt/jznpnrbeopl/ECB0605.PNG

 

7/ AUSTRALIA

Australia’s economic rebound has surpassed expectations but the Reserve Bank of Australia, which has underscored its dovish credentials by adopting yield curve control, could be among the last to tighten policy.

It wants unemployment slashed and inflation within its 2% to 3% target before shifting tack, and doesn’t see either happening until 2024. Economists expect rates to stay on hold until then.

The RBA’s A$100 billion ($77.45 billion) QE programme ends in September and it will consider in July whether to extend it.

8/ NEW ZEALAND

New Zealand’s strong recovery and red-hot property markets have raised speculation a rate rise may come sooner than expected.

While its key interest rate is expected to stay at 0.25% this year, some analysts predict a rise in the second half of 2022. The central bank meanwhile appears to be in no hurry to taper its NZ$100 billion ($72 billion) QE programme.

9/ JAPAN

The BOJ pledged last week to maintain stimulus using yield target control and via bonds and equity purchases.

It has been accused of “stealth tapering” because its bond-buying has slowed since yield curve control (YCC) was adopted in 2016, though purchases have picked up slightly in the past year.

In March, they were about 22.2 trillion yen ($204 billion)above levels a year ago. But that’s still a quarter of the 81.96 trillion yen year-on-year increase in August 2016, just before YCC came in.

 

For a graphic on BOJ steadily ‘stealth’ tapering its JGB buying:

https://graphics.reuters.com/GLOBAL-CENTRALBANKS/TAPER/bdwpkbmllvm/chart.png

 

10/ SWITZERLAND

The Swiss National Bank does not intervene in domestic bond markets, instead capping the Swiss franc through interventions which came to nearly 110 billion francs ($120 billion) in 2020. The proceeds are used to purchase foreign bonds and equities.

The SNB shows no signs of departing from its interventionist policy; its chairman Thomas Jordan said last week that negative rates and a readiness to intervene in currency markets remain “essential”.

 

(Reporting by Sujata Rao, Tommy Wilkes, Saikat Chatterjee and Dhara Ranasinghe in London and Leika Kihara and Daniel Leussink in Tokyo; Editing by Toby Chopra)

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