Montreal, Canada
Is a strong currency a good thing?
Ultimately, a strong currency is bullish for domestic capital markets since it reinforces legitimacy of government fiscal policies, trends in domestic consumption and boosts foreign direct inflows. Global investors like buying a rising currency.
But in the age of competitive currency devaluations since the demise of the Bretton-Woods monetary system in 1971, more countries are devaluing against the dollar and vis-à-vis each other. For all intents and purposes, the Chinese export model has exacerbated this secular trend whereby just about everyone else must maintain a competitive currency in order to compete with China's massive export machine. Nobody really wants a strong currency.
Canada, where I was born and currently reside, is home to one of the best-performing currencies in the world since 2003. As a resource economy, she shares this distinction with other commodity currencies – namely Brazil, Norway and Australia. All four currencies have pounded the American dollar over the last six years.
Canada's biggest banks survived the credit crisis with minimal losses and never requested a single dime from the federal government. Most Canadian banks trade near their 52-week highs and some even boosted dividends this year.
Canada is mostly about commodities, including vast oil sands reserves, natural gas, pulp and paper, mineral wealth and gold mining. It's also rich in lakes and rivers and has an enormous supply of clean water. Canada is also America's largest customer for hydroelectric power, pulp and paper and natural gas among other natural resources. China is also a growing customer as she seeks to feed her insatiable appetite for raw materials.
Canada is now on everyone's bull market wish-list. Institutions love the Canadian dollar or loonie and have lunged after Canadian assets since world markets bottomed in March. Since March 9, the loonie has risen a cumulative 19.7% against the U.S. dollar.
If the United States is still in the midst of a severe real estate bear market then Canada is radically on the other side of the fence. Residential mortgages in Canada require a 25% down-payment and the CMHC, or the Canada Housing and Mortgage Corporation, is a strictly regulated operation where foreign housing agencies look to mimic.
Domestic real estate prices across the nation are still firming with commercial rents still relatively strong and vacancy rates in Toronto – Canada's financial capital – still historically low at roughly 8% compared to more than 18% in the early 1990s when the market was saturated. Montreal real estate, which crashed under the weight of political uncertainty for 20 years, has rebounded sharply over the last ten years with prices firming again in 2009.
To be sure, Canada's sweet spot faces hurdles – mostly from a soaring loonie and the prospects of a weak economic recovery in the United States.
Canada now sits on its biggest fiscal deficit in almost two decades (C$55 billion dollars) and is struggling to withdraw monetary stimulus (unlike Australia and Norway) as manufacturing continues to suffer job losses. Domestic spending, which remains brisk, is more than offset by falling demand for Canadian exports and depressed job figures. Canada can't escape U.S. trade ties – currently more than 70% of GDP is derived from trade with the United States.
Despite current challenges, Canada will emerge much stronger from the credit crisis than her big brother south of the border. Relative to other nations Canada still sports a low debt-to-GDP ratio of roughly 33.4% compared to almost 200% for Japan almost 100% in the United States. Canada also has something China wants – raw materials – and lots of it.
It's my absolute thrill and privilege to have The Sovereign Society host their next conference in Montreal next May. Montreal offers the best Canada has to offer – including French and English historical influences and arguably the best cuisine in North America – better than New Orleans. I hope to see you in Montreal in 2010!
"Residential mortgages in Canada require a 25% down-payment and the CMHC, or the Canada Housing and Mortgage Corporation, is a strictly regulated operation where foreign housing agencies look to mimic."
You might want to get your facts straight. The 25% rule changed years ago and only 20% is required before CMHC kicks in. I didn't have time to proof read the rest of your article.
Posted by: Fred | December 03, 2009 at 01:43 PM
"Canada is also America's largest customer for hydroelectric power, pulp and paper and natural gas among other natural resources."
did you mean supplier, not customer here?
Posted by: daveW | December 03, 2009 at 10:17 AM