The Canadian dollar's race to U.S.-dollar parity may well be predicated on certain yet-to-be-proven assumptions about everything from interest rates to Chinese energy demand. But that doesn't mean it's built on speculative trading by Messrs. Smoke and Mirrors. There's still an awful lot of very real foreign money backstopping the loonie.
Statistics Canada reported this week that net foreign purchases of Canadian securities were $11.8-billion in January, the fourth time in five months that net foreign inflows have topped $10-billion, generally a high-water mark for foreign inflows. Over the past 12 months, foreign buyers have snapped up a record-smashing $111.7-billion of Canadian bonds, stocks and short-term money market instruments.
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"To put this in perspective, $111-billion is more than 7 per cent of Canadian GDP, it's nearly three times the size of last year's current account deficit ($41-billion), and it's larger than the budget deficits of Ottawa and all the 10 provinces combined. In other words, it's big," said Doug Porter, deputy chief economist at BMO Nesbitt Burns.
DIFFERENT THAN IN 2007
The influx of foreign money buying Canadian securities is a direct support for the currency because it involves the purchasing of Canadian currency to pay for those securities - in other words, real physical demand for the dollar, not just trading demand. That's in sharp contrast to the last time the dollar topped parity with its U.S. counterpart, in 2007.
Back then, the dollar's surge coincided with lukewarm foreign demand for Canadian securities. Shortly before the currency peaked, foreigners were actually fleeing Canadian holdings at a record pace.
As it turned out, the loonie's 2007 heights proved unsustainable - probably a symptom of one of the many speculative asset bubbles that formed in the late stages of the credit bubble. At any rate, global investors weren't buying into the Canadian dollar story.
For the past 11/2 years, though, the dollar has risen in relative sync with foreign investment inflows.
Certainly the improving outlook for the dollar itself - fuelled by expectations of a relatively strong Canadian economic recovery, rising global commodity demand and hopes that the Bank of Canada will be an early rate hiker - has encouraged foreigners to buy Canadian-dollar assets.
But regardless of the reason, that buying has given the currency much stronger fundamental support than it had the last time it pushed through the parity barrier.
MY BAD MATH
In the Market Lab column of March 17, I badly booted my description of the "simple equation" for dividend yield, saying it was calculated by dividing the stock price by the annual dividend. It is, of course, the other way around - you divide the annual dividend by the stock price. Thanks to the readers who pointed out my error.