Last week the Canadian dollar dipped below parity with the US dollar for the first time since mid-November 2012 after the Bank of Canada (BoC) held the target for its overnight rate at 1 percent and signaled a more dovish stance than had been articulated in previous monetary policy announcements.

Concluding its Jan. 23, 2013, statement the BoC noted, “While some modest withdrawal of monetary policy stimulus will likely be required over time, consistent with achieving the 2 per cent inflation target, the more muted inflation outlook and the beginnings of a more constructive evolution of imbalances in the household sector suggest that the timing of any such withdrawal is less imminent than previously anticipated.”

The BoC has held its benchmark rate at 1 percent since September 2010, the longest pause since the 1950s.

The loonie has bounced today off a nearly six-month closing low of USD0.9938 on Monday, the worst since the currency ended the Aug. 2, 2012, trading day at USD0.9927. As of this writing the Canadian dollar is worth USD0.9973. The loonie is now down 3.4 percent from its 12-month closing high of USD1.0326 established Sept. 13, 2012.

In its January Monetary Policy Report (MPR), released the same day it made the rate announcement, the BoC cut its forecast for Canadian gross domestic product (GDP) growth in 2013 to 2 percent from an October 2012 forecast of 2.3 percent. Although the growth outlook is weaker than forecast in its last quarterly MPR, the BoC noted that “global tail risks have also diminished.”

The BoC also noted that US growth continues “at a gradual pace,” citing restraints imposed by “ongoing public and private deleveraging, global weakness and uncertainty related to fiscal negotiations.” The austerity-exacerbated recession in Europe continues and will be worse than anticipated in October. China, however, is getting better, though activity in other emerging economies has yet to pick up.

The BoC pointed out that though commodity prices remain historically high “temporary disruptions” and “persistent transportation bottlenecks” have constrained prices for Canadian heavy crude oil, a key export. Canada’s slowdown in the second half of 2012 was more dramatic than the BoC anticipated due to lower levels of business investment and reduced exports.

Governor Mark Carney’s message about excessive levels of debt appears to be hitting households, as renewed caution “has begun to restrain” spending.

The BoC expects economic growth to pick up through 2013, as business investment and exports rebound on strengthening foreign demand, diminishing uncertainty and the unwinding of temporary factors that have weighed on resource sector activity.

Core inflation and total CPI inflation are both lower than the BoC forecast. The bank expects total CPI inflation to remain around 1 percent in the near term, rising “gradually, along with core inflation” to the 2 percent target in the second half of 2014 as the economy returns to full capacity.

The BoC will make its next interest rate announcement on Mar. 7, 2013.

Moody’s Downgrades Big Six Banks

On Monday Moody’s Investors Service downgraded its long-term senior debt ratings for five of Canada’s six largest banks by one notch due to “ongoing concerns that…exposure to the increasingly indebted Canadian consumer and elevated housing prices leaves them more vulnerable to unpredictable downside risks facing the Canadian economy than in the past.”

As of Sept. 30, 2012, the ratio of Canadian household debt to personal disposable income reached a record 165 percent, up from 137 percent as of June 30, 2007. Growth in consumer debt has been driven by rising house prices, which have increased by approximately 20 percent since November 2007.

Moody’s also noted, however, that the Big Six remain among the highest-rated banks in its “global rating universe.” Canada’s banks have been rated the world’s “soundest” for five straight years by the World Economic Forum.

Royal Bank of Canada (TSX: RY, NYSE: RY), which was spared this time around, had its rating cut by two levels to Aa3 on June 21, 2012, as part of the credit rater’s evaluation of firms with global capital market operations.

Moody’s also identified Canadian banks’ reliance on wholesale funding as well as exposure to capital markets–both of which are sensitive to fluctuations in investor confidence–in its statement explaining the mass downgrade. Moody’s base-case calls for Canadian GDP to expand by 2 percent to 3 percent in 2013, though it notes that “downside risks have increased,” mainly due to rising potential for external shocks.

Bank of Montreal (TSX: BMO, NYSE: BMO), Canadian Imperial Bank of Commerce (TSX: CM, NYSE: CM) and National Bank of Canada (TSX: NA, OTC: NTIOF) were downgraded to Aa3 with a “stable” outlooks from Aa2. Bank of Nova Scotia (TSX: BNS, NYSE: BNS) was downgraded to Aa2 with a “stable” outlook from Aa1. Toronto-Dominion Bank (TSX: TD, NYSE: TD), the last of the Big Six to hold a Aaa rating, was downgraded to Aa1 with a “stable” outlook.

BMO has relatively high exposure to unsecured and non-real estate secured consumer loans, which Moody’s forecasts to be the types of debts most likely to lead to significant losses in the event of a “sharp” economic downturn. Moody’s also noted that BMO’s capital markets earnings contribution is the second-highest among the Big Six.

CIBC is the most reliant of the Canadian banks on domestic personal and commercial banking earnings. It’s not as diversified as its peers, so a “system-wide economic shock” or “a prolonged period of low growth and low interest rates” would have a significant impact on the bottom line. On the positive side, CIBC has backed away from “less stable” capital markets earnings in its long-term growth strategy.

National Bank’s capital markets exposure is proportionately higher than the rest of the Big Six. Due to the makeup of its capital markets earnings profile National Bank also has the highest pre-tax earnings volatility among its peer group with the exception of CIBC. And it’s at the “high end” with regard to unsecured and non-real estate secured Canadian consumer loans as a proportion of their Canadian consumer loans.

Scotiabank, meanwhile, “has the most diversified earnings profile of the peer group” and “low historical earnings volatility,” evidence of “the consistent quality of execution against its diversification strategies.” Nevertheless, mid-level exposure to “less well secured” Canadian consumer debt and greater dependence on wholesale funding “weigh on” its rating.

TD has the lowest proportional capital markets exposure among the Big Six, mid-level dependence on Canadian personal and commercial banking and relatively limited vulnerability due to less well-secured consumer loans. But the increasing contribution of its “less well positioned” US subsidiary is cause for concern.

The market has basically shrugged Moody’s off, with all five of the recently downgraded members of the Big Six trading within a good day’s rally of their respective five-year highs.

In an environment of deeply, historically compressed official interest rates the Big Six will remain under pressure to grow earnings at levels commensurate with recent experience.

But Canada’s banks are well prepared against a systemic crisis akin to that which occurred in 2007-09. And signs of a strengthening US economy as well as new momentum in China are also positive tailwinds, despite lingering domestic political questions south of the border and the need for a renewal of the Middle Kingdom’s growth model.

It’s true that Canadians’ debt is at relatively high levels. And it’s also true that house prices have likely plateaued. But it’s equally true that job and wage growth in the Great White North continues to surprise to the upside, which means that Canadians–who also have minimal out-of-pocket health care expenses and so have more income at their disposal–are well able to service their debts.

And, unlike their American counterparts, Canadian authorities, including Finance Minister Jim Flaherty, have been quick to tighten mortgage application rules and up down payment requirements in order to guard against a US-style, subprime-led implosion.

Bank of Montreal will kick off the next round of earnings reporting–for the first quarter of fiscal 2013–for the Big Six on Feb. 26. CIBC and TD will report on Feb. 28, Scotiabank on March 5. National Bank and RBC have yet to confirm dates but are likely to report on or about March 1.

The Roundup

Here’s when Canadian Edge Portfolio Holdings will report their next sets of numbers. Dates are described as “confirmed” if companies have already announced release dates or “estimate” if we’re making a forecast based on past practice. We’ve linked to analyses of companies that have already posted results.

Conservative Holdings

• AltaGas Ltd (TSX: ALA, OTC: ATGFF)–March 8 (estimate)
• Artis REIT (TSX: AX-U, OTC: ARESF)–Feb. 28 (confirmed)
• Atlantic Power Corp (TSX: ATP, NYSE: AT)–Feb. 28 (estimate)
• Bird Construction Inc (TSX: BDT, OTC: BIRDF)–March 7 (estimate)
• Brookfield Real Estate Services Inc (TSX: BRE, OTC: BREUF)–March 12 (estimate)
• Brookfield Renewable Energy Partners LP (TSX: BEP-U, OTC: BRPFF)–Feb. 8 (confirmed)
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–Feb. 26 (confirmed)
• Cineplex Inc (TSX: CGX, OTC: CPXGF)–Feb. 7 (confirmed)
• Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF)–March 6 (estimate)
• Dundee REIT (TSX: D-U, OTC: DRETF)–Feb. 20 (confirmed)
• EnerCare Inc (TSX: ECI, OTC: CSUWF)–Feb. 22 (estimate)
• Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF)–March 14 (confirmed)
• Keyera Corp (TSX: KEY, OTC: KEYUF)–Feb. 15 (estimate)
• Northern Property REIT (TSX: NPR, OTC: NPRUF)–March 13 (confirmed)
• Pembina Pipeline Corp (TSX: PPL, NYSE: PBA)–Feb. 15 (estimate)
• RioCan REIT (TSX: REI, OTC: RIOCF)–Feb. 14 (confirmed)
• Shaw Communications Inc (TSX: SJR/A. NYSE: SJR)–Jan. 10 Flash Alert
• Student Transportation Inc (TSX: STB, NSDQ: STB)–Feb. 13 (estimate)
• TransForce Inc (TSX: TFI, OTC: TFIFF)–Feb. 28 (estimate)

Aggressive Holdings

• Acadian Timber Corp (TSX: ADN OTC: ACAZF)–Feb. 12 (confirmed)
• Ag Growth International Inc (TSX: AFN, OTC: AGGZF)–March 14 (estimate)
• ARC Resources Ltd (TSX: ARX, OTC: AETUF)–Feb. 8 (estimate)
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–Feb. 22 (estimate)
• Colabor Group Inc (TSX: GCL, OTC: COLFF)–March 22 (estimate)
• Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF)–March 15 (estimate)
• Extendicare Inc (TSX: EXE, OTC: EXETF)–Feb. 27 (confirmed)
• IBI Group Inc (TSX: IBG, OTC: IBIBF)–March 26 (estimate)
• Just Energy Group Inc (TSX: JE, NYSE: JE)–Feb. 7 (confirmed)
• Newalta Corp (TSX: NAL, OTC: NWLTF)–Feb. 15 (estimate)
• Noranda Income Fund (TSX: NIF-U, OTC: NNDIF)–Feb. 14 (estimate)
• Parkland Fuel Corp (TSX: PKI, OTC: PKIUF)–March 7 (estimate)
• PetroBakken Energy Ltd (TSX: PBN, OTC: PBKEF)–March 7 (estimate)
• Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF)–March 7 (estimate)
• Vermilion Energy Inc (TSX: VET, OTC: VEMTF)–March 5 (estimate)
• Wajax Corp (TSX: WJX, OTC: WJXFF)–March 6 (estimate)