Much Love for the Great White North

By David Dittman • August 17, 2012 • Canadian Edge Weekly

The Canadian dollar has surged to parity and beyond in August, driven higher by a combination of returning appetite for risk as well as a longer-term hunger of global central banks and other foreign purchasers for a means of safely diversifying assets away from weaker currencies.

As of Friday afternoon the loonie was at USD1.0108, up 5.2 percent from a 2012 closing low of USD0.9606 established Jun. 1. The Canadian dollar reached parity on Aug. 7 and has continued its run this month, as stronger economic data, admiring words from ratings agencies and hosannas from global leaders have coupled with the traditional catalyst, rising oil prices, float the loonie higher.

On Thursday, Aug. 16, Moody’s Investors Service, in its annual report on the country, reiterated Canada’s AAA rating, citing the country’s economic performance as well as the federal government’s financial position. Moody’s said that both have endured the global recession “better than most other top-rated sovereigns.”

Sixteen of the 133 countries rated by Moody’s boast AAA ratings. But a number of them, such as the US, the UK, Germany and France, bear “negative” outlooks due to their respective governments’ fiscal positions. Canada’s outlook is “stable.”

“Canada did not experience a financial crisis such as the one that affected the US and a number of European countries,” noted Moody’s.

The rating agency dismissed concern about Canada’s housing market, one of the longstanding concerns about the Great White North’s economy along with household debt, calling it “manageable in terms of its potential effect on federal finances.”

Moody’s did note that the recession reversed an earlier improvement in debt ratios but concluded that they are improving and didn’t deteriorate as much as in most other AAA-rated countries.

Moody’s rated Canada’s economic resiliency and government financial strength as “very high” and said the country has a “low susceptibility to event risk.”

The Canadian economy’s ability to withstand the downturn was based on very high per capita income, its large scale and its diversity, featuring natural resource industries, a competitive manufacturing sector and a well-developed financial and real estate market.

Canada ranks 11th out of 113 sovereigns rated by Moody’s in terms of the size of its economy and 14th out of 109 countries in terms of its gross domestic product (GDP) per capita.

“On the public finance front, Canada’s ratios of general government debt to GDP and to revenue moved significantly downward over the decade through 2008,” reported Moody’s. “In facing the global crisis, the federal government’s balance sheet started from a strong position.”

Moody’s did warn that the country’s heavy reliance on crude prices could be a drag on the economy. “The drop in prices that has taken place in 2012, combined with lower demand in the US, could potentially have a significant impact on the growth performance of the economy,” Moody’s said in its report.

The generic front-month crude oil futures contract traded on the New York Mercantile Exchange has rebounded from a 2012 closing low of USD77.69 on Jun. 28 to USD96.23 as of late Friday. The more global generic Brent crude contract has bounced from USD89.23 on Jun. 21 to USD113.76. Oil and gas production accounted for roughly a fifth of Canada’s economic growth in 2010 and 2011, according to Moody’s.

Meanwhile, German Chancellor Angela Merkel, on a visit to the Great White North, praised Canada’s budget discipline, promotion of economic growth and “not living on borrowed money” as models for the 17-nation euro region.

“This is also the right solution for Europe,” Ms. Merkel said at a reception in Ottawa late Wednesday before talks with Prime Minister Stephen Harper, according to a transcript posted on the German government’s website.

The chancellor, leader of Europe’s largest economy and the biggest single contributor to euro-region bailouts, is facing calls from Italy and Spain to pool debt to bring down bond yields, from Greece to back an easing of its austerity timetable and from the European Central Bank for politicians to take the lead in fighting the crisis.

President Barack Obama, Canada and major developing countries are also pressing Europe to stamp out the crisis that’s weighing on the global economy.

As Moody’s notes in its report, however, one of the primary reasons for Canada’s continuing health is that it moved from a position of strength to shore up growth before things deteriorated to a point of no return, a so-called deflationary spiral. You’ll recall the Canadian government did return to deficit spending, under a Conservative government, to pursue true Keynesian remedies.

“They need to do much more,” Canadian Finance Minister Jim Flaherty said before Ms. Merkel arrived. “We have been clear for several years that not only should the European countries take overwhelming concerted action to take control of the situation, but also that the European countries have more than adequate resources to do so.”

Based on at least one technical indicator, the Canadian dollar is in the midst of a secular bull run: It continues to make higher lows–meaning buyers step in sooner after downturns–on its march toward a new normal around and above parity with the US dollar.

As the estimable David Rosenberg of Gluskin Sheff + Associates recently noted, “Indeed, once again, the story for the Canadian dollar in the recent crossfire was how well it held up–bottoming at 96 cents this time around, compared with 95 cents in 2011, 93 cents in 2010 and 77 cents in 2009.” Part of the recent run is, of course, about the recent rise in oil price. But there’s much more to it than that. Much more: Canada’s strong fundamentals have been a magnet for capital inflows.

Statistics Canada reported a record in-flow of foreign money into Canadian securities in May, notably Canadian government bonds, the same day the yield on federal government 10-year bonds touched a record low of just under 1.6 percent. Those foreigners purchased a record CAD26.1 billion of Canadian securities two months ago, CAD16.7 billion of which were government bonds.

The Roundup

Here’s where to find my second-quarter earnings analysis and outlook for all Canadian Edge Portfolio Holdings. The only company not yet reporting is Student Transportation Inc (TSX: STB, NSDQ: STB), which is on a different reporting schedule. The company will release its fiscal 2012 fourth-quarter and full-year (ended Jun. 30) results in late September. Full-year results take somewhat longer to compile than quarterly tallies.

Conservative Holdings

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