I’ve been traveling regularly to Canada since the late 1980s. When I first started visiting north of the border, the Loonie was in the low 60s compared to the U.S. Dollar. Canada’s national fiscal picture was among the worst in the G-7. Thankfully, those days are long gone and Canada is truly among a handful of western world countries that has its house pretty much in order. Its neighbor to the south, meanwhile, has greatly surpassed the fiscal mess Canada once found itself in, and the U.S. is teetering on becoming a second-rate country in more ways than one. While this has and should continue to impact Canada now and in the future (due to still being somewhat tied to the hip of the U.S. economically), the world continues to show more respect to Canada’s superior fiscal health. That has and should continue to benefit the nation as a whole.
The Canadian Dollar as a safe-haven currency is justified by Canada’s strong fiscal condition. It continues to rein in spending, cutting or maintaining taxes at current levels, and may even reduce its national debt. Unlike many other nations that saw their financial systems brought to their knees, Canada’s remains robust, as evidenced by the fact that none of its banks have required government bailouts. Thus, Canadian sovereign debt has continued to appreciate in spite of numerous crises.
To understand how well Canada is actually doing, it’s important to note that the International Monetary Fund (IMF) recently said that Canada is likely to be the first of the seven major industrialized democracies to return to a budgetary surplus status by 2015. It also continues to greatly outperform its neighbor to the south in GDP growth without any real signs of overheating.
This performance has also been greatly appreciated in the financial world. Bill Gross, one of the world’s most recognized financial experts, said not too long ago that he’s “in awe” of countries such as Canada that have a low debt-to-gross-domestic-product ratio and solvent financial institutions. “North of the border” has become a “preferable destination” to what he sees in the United States. He’s not alone. Countries like Russia, China and others have either announced actual purchases of Canadian dollars for their foreign reserves or the intent to do so. This is occurring while its neighbor to the south watches it’s terminally ill currency weaken further and further.
Canada is not without any economic, political, or social concerns. The fact that the U.S. and Canada are the world’s two biggest trading partners is not a plus given my belief that the U.S. economy is going to greatly underperform for several years to come. It also still gets tagged as a “commodity” currency and when natural resources like oil and gas decline in price, some people get overly concerned about how that may impact Canada negatively. I believe more and more analysts are starting to look beyond commodities historically seen as the cornerstone of Canada’s economy. When the price of oil fell sharply earlier this year, the Loonie hardly budged. I believe this is yet another indication of how the world continues to look more favorably on Canada when compared to most other players in the Western world.
I continue to look for the Loonie to benefit from a positive interest rate differential with the United States. Thanks to two consecutive rate hikes by the Bank of Canada (BOC), this was the first G7 Central bank to tighten while the U.S. Federal Reserve continues to flood its system through large-scale quantitative easing. If the Bank of Canada fulfills my expectations and hikes rates again before year’s-end, this differential will widen further. In fact, it could continue expanding well into 2011, since the BOC is well ahead of the Fed in its monetary policy cycle.
Parity with American currency was once little more than a pipe dream for Canadians. In my opinion, soon it can become not only a reality, but end up the bottom of a range that can see it grow to a 10 per cent premium in the years ahead.