Forex Investment and Currency Trading

• The lengthening list of downside USD/CAD risks includes Canada’s sharply improved terms of trade (ratio of exports to import prices). M&A inflows might provide the spark for a move lower.
• Canada’s energy future, be it oil or natural gas, is decidedly unconventional. The economics of unconventional resources depend crucially on persistently high prices.

Portfolio Inflows Belie Stability of CAD
CAD has not been much affected by net portfolio flows over the past few years, unlike the impact of lumpy mega-M&A transactions. Thus, even though CAD has rallied over the past few years, portfolio flows have gone against the grain, largely due to Canadian investor demand for foreign securities. In particular Canadian investors clamoured for foreign-issued CAD-denominated Maple bonds through 2006 until the onset of the credit crisis in mid-2007. However, as they were CAD denominated, the purchases of Maple bonds had limited CAD impact. Now however, we are seeing a clear trend reversal. Portfolio flows are now decided inward. Net foreign purchases of Canadian securities topped C$30bn January-to-May, highest since 1993, and seemingly belying the stability of CAD against USD.

CAD Not Helping to Spread the (Commodity) Wealth
The BoC did not say so, but a stronger CAD is quite important to their statement that “final domestic demand is projected to be the key driver of economic growth,” in line with “recent increases in commodity prices.” The recent stability of CAD despite the improved terms of trade means that CAD is not acting a terms-oftrade “shock absorber,” which in turn means CAD is not doing enough to keep inflation pressures in check, nor is it helping spread the (commodity) wealth across the country. This means that the Canadian economy and domestic spending will not gain the full benefit of the “continued improvements n Canada’s terms of trade,” with regard to spending power, keeping aggregate supply and demand in balance, or inflation control.