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Currency markets • Dagmara Fijalkowski, MBA, CFA
have been much more meaningful had
the loonie traded at cheaper valuation
levels.
Since many foreigners have added
Canadian dollars and Canadian assets
to their portfolios over the past few
years, scrutiny of Canada’s fiscal
position is now intense. Last year,
Canada’s current account dipped into
deficit for the first time in 20 years.
While short-term portfolio inflows,
mostly bond purchases, have more
than offset the deficit, the inflows
peaked eight quarters ago and the
stability of the funding depends on
whether Canadian bonds remain
attractive to foreign buyers (Exhibit 13).
This vulnerability is also highlighted
by Canada’s terms of trade, which
represent the value of a country’s
exports relative to its imports. While
the Canadian dollar’s recent strength is
comparable to 2007, Canada’s terms
of trade are 10% lower (Exhibit 14).
They reflect not only the heavy weight
of weak natural gas prices in exports,
but also the unusually low price that
Western Canada receives for oil exports
relative to the price paid by eastern
Canada, which relies on imported oil
(Exhibit 15). Since energy exports have
been rising as a percentage of overall
exports over the past decade (to 25%
from 10%), global trends in commodity
prices have become more relevant for
the Canadian dollar.
From a technical standpoint, the U.S.
dollar finds its first support at 98
cents, the level we have been calling
an “opportunity” to buy U.S. dollars for
the past six months. The next support,
at 96 cents, would be a rare “gift” and
a great chance to exchange expensive
EXHIBIT 14.
0.85
0.95
1.05
1.15
1.25
1.35
1.45
1.55
1.65
U.S. Dollars
USDCAD vs. Terms of Trade
USDCAD (LHS, inverted)
CAD Terms of Trade (RHS)
1995 1997 1999 2001 2003 2005 2007 2009 2011
EXHIBIT 15.
130
120
110
100
90
80
70
60
50
40
Source: Bloomberg
Crude Oil Spot Prices
Brent (Europe)
West Texas (U.S. Midwest)
Western Canada Select
Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12
Source: Bloomberg
SAMPLE
loonies for cheap greenbacks. The
longer the time horizon, the more
attractive the U.S. dollar becomes
below parity and the more comfortable
investors should be holding it.
To summarize, a Canadian currency
above parity is priced for perfection
and vulnerable to downward revisions
in global growth. The most important
short-term support comes from the
Bank of Canada’s hawkish stance visà-vis
the Fed. However, the long-term
positives are mostly known, and with
the Canadian dollar 20% higher than
115
110
105
100
95
90
85
80
75
its PPP valuation, they are already
reflected in the price.
The British pound
The Eurozone crisis means that the
pound’s limitations are being largely
overlooked, and sterling now walks
as a one-eyed man in the land of
the blind. Looked at in isolation, the
positives for the currency are not that
positive, but given valuations and the
mess across the Channel, the pound
stands up to closer scrutiny. For one
thing, Britain’s current-account deficit
48 I The global investment outlook RBC INVESTMENT Strategy coMMITTEE Summer 2012