What is it that's attracting foreigners to the splendors of Canada? Is it the Rockies? Niagara Falls? Our ability to be polite in multiple languages?
Well, maybe. But lately, it's been our picturesque bonds.
Statistics Canada reported this week that foreign investors purchased a net $10.5-billion of Canadian securities in June, more than half in bonds. That's on top of a net $18.8-billion inflow of foreign investment in May, and lifted the year-to-date net inflow to a whopping $61-billion - almost 70 per cent of which was in bonds. The Canadian dollar's recent surge may have discouraged foreign tourists from vacationing in the Great White North (foreign visits to Canada were down 13 per cent in June), but it's had no such effect on foreign investment.
CHICKEN OR EGG?
As National Bank Financial noted in a report this week, the portfolio position for Canadian investment (net foreign purchases of Canadian securities minus net Canadian purchases of foreign securities) has been rising in concert with the currency in recent months.
One possible explanation for this is the relative strength in the loonie, which may be attracting foreign money in search of returns enhanced by a stable and rising currency.
But at the same time, the inflows have been providing an underpinning of support to the Canadian dollar. While the investment flows aren't sufficient to drive the currency's direction (the value of funds that change hands in the foreign exchange market dwarf these foreign-investment-flow figures), they do reinforce that the loonie's rally is more than just idle currency speculation - it is supported by real demand to invest in Canada.
SELLING CANADA
Interestingly, the net foreign investment in Canada continued to boom in June even as the Canadian dollar pulled back from its rally highs. While a net $2.7-billion flowed into money market instruments - essentially cash holdings that may have been looking to buy into Canadian dollars on their dip - the heavy demand in the bond market suggests the currency wasn't the only story.
Stewart Hall, economist and strategist at HSBC Securities (Canada), said the bond demand probably stemmed not so much from foreign buyers seeking Canadian paper, but the other way around. A flood of new Canadian bond issues - both on the corporate side and from the federal government raising funds to finance its stimulus package - sought buyers outside a domestic market that had become overcrowded with supply.
Indeed, he noted, much of the new issuance was denominated in foreign currencies (mostly U.S. dollars), for which the Canadian currency story would be irrelevant. (Foreign currency denominated bonds issued by Canadian entities still count as foreign investment into Canada.)
Still, the fact that the new issues found eager foreign buyers speaks to the same pro-Canadian investment foundation that has been supporting the loonie.
Canada's relatively strong fiscal position, its stable financial sector and its high exposure to commodities have investors lining up for a piece of Canada's action, in anticipation of a global recovery.
"Canada is one of the basket of markets that investors are trying to lever for the global growth story," Mr. Hall said. "It's a reflection of confidence in Canada."
David Parkinson