The dollar’s strong (but not the one you think)
are widely regarded as being in much better position than the top banks in the U.S..
"The recession was milder since Canada’s banking system is fairly healthy," said Paul Ashworth, senior economist with Capital Economics, a research firm based in Toronto. "Canada never had a housing downturn that was anything like what happened in the U.S."
Some Canadian companies have even tried to capitalize on this image of financial strength in their ad campaigns. Toronto-based insurer Sun Life Financial (SLF), which has a big presence in the U.S. and even has the naming rights for the Miami stadium where the Dolphins and Marlins play, boasts in commercials that it didn’t take any government bailout money.
That’s all well and good. But will Canada keep attracting strong investor interest or is the fact that Canada isn’t the U.S. already priced into their currency, stocks and bonds?
Ashworth said that the rise in gold, which is partly a fear trade, has certainly helped Canada. So if gold prices cool, that could hurt the Canadian dollar.
But he said that if gold falls on hopes that the global economy is going to avoid another major meltdown, the trade-off would probably be higher oil prices. That could offset any weakness in gold.
"The bottom line is that the loonie is still a petro currency," he said.
So as long as the Canadian economy holds up, there is a good chance that Canadian assets could continue to perform well. After all, Canada’s central bank took the first step towards bringing interest rates back to normal earlier this month.
The Bank of Canada boosted rates by a quarter-of-a-point to 0.5%. That makes Canada the first of the so-called G-7 group of industrial nations to raise rates since the onset of the global financial crisis in 2008.
Stefane Marion, chief economist and strategist with National Bank Financial Group in Montreal, points out that the Bank of Canada is likely to raise rates again next month. And that’s lifting bond rates in Canada.
The difference between the yield on 2-year Canadian bonds and the 2-year U.S. note is about a full percentage point. In other words, investors believe they’ll be able to get a better rate of return in Canada because the economic fundamentals look stronger.
"Gone are the days when foreign investors thought of North America as only the U.S.," Marion said. "People are discriminating between Canada and the U.S. There’s probably limited downside for the Canadian dollar and other assets unless there’s a major global economic relapse."
Reader comment of the week. To quote Hannibal from "The A-Team" (and did they really need to make a movie of the TV show?), I love it when a plan comes together. This week’s best reader retort fits perfectly with the theme of today’s column.
I wrote on Monday about how Brazilian oil company Petrobras could benefit from the BP fiasco in the Gulf of Mexico. Paul Dupuis took issue with that.
"Why would you suggest Brazil when there is over a trillion barrels in oil reserves in Alberta??? No drilling in water here and we are already are the largest supplier of oil to the U.S.," he wrote.
Well said.
- The opinions expressed in this commentary are solely those of Paul R. La Monica.