Canadian International Securities Transactions Sunday, September 17, 2006
Outlook: Net investment in Canadian assets is expected to rebound in July as international investors sought higher and more reliable yields. All three asset classes measured by the securities transaction read (equities, government debt and company bonds) were likely in demand through the month. Starting with the most risky, equities, a strong performance by the TSX/S&P Composite index was likely the first attraction for capital influx. The TSX index advanced to 11,900 after a brief retracement in the middle of the month, to match the highest level seen in two-and-a-half months. Furthermore, for those seeking the returns on stocks, a strong interest in owning Canadian resource producers was facilitated by record prices in a few key commodities and an intensifying M&A interest, which in itself likely boosted the balance. Despite the optimism in equities, most of the inflow of international capital probably found its way into corporate and government bonds. Though the Bank of Canada made it more than clear it wouldn’t raise rates again in the near future, the US Fed was saying much of the same. With spreads fixed between the two, and the US actively engaged in conflicts, verbal or otherwise, in Iraq, Iran and other places in the world; Canada was more secure in its neutrality. One potential problem however could have been fear over fluctuations in exchange rates. At a 28-year high against the US dollar, if the loonie appreciates dramatically while an investor has money in Canada, their returns would be shaved when they exchange back to their home currency.
Previous: Canada’s net surplus on securities investment fell to its lowest point this year in June as foreign investors lightened their supplies of Canada’s bonds and Canadians looked to use the favorable exchange rate and higher yields across the boarder to stretch the returns in foreign markets. According to Statistics Canada, international securities transactions shrank to a net C$343 million from C$5.876 billion in May. For global investors looking to place their money with less risky, yet high yielding assets, the appeal of Canadian bonds shrank after the BoC decided to halt its string of seven consecutive interest rate hikes. Perhaps more burdensome for the surplus however was Canadians investment abroad. With the US not yet revealing its decision to halt rate hikes, the rate differential was pulling more capital south of the border.
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