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Why Goldman Sachs recommends shorting the Canadian dollar Add to ...

These are stories Report on Business is following Thursday, Nov. 28, 2013.

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Goldman on the loonie
Take a look at today's current account report from Statistics Canada to see why Goldman Sachs Group Inc. recommends shorting the loonie.

As The Globe and Mail’s Scott Barlow reports, the Wall Street giant forecasts the Canadian dollar will sink to 88 cents U.S. One of its reasons is that Canada has been running a current account deficit.

There are other reasons, but that one tops the list.

“Since the global financial crisis, significant external imbalances have built up in the Canadian economy,” Goldman said.

“In 2008, the current account balance fell from a surplus of 1 per cent of GDP to a deficit of 3 per cent – and it has remained stable at this level since then,” the bank said in its report.

“The main reason for this has been a decline in manufacturing exports, which fell by about 30 per cent during the crisis.”

Over the past several quarters, Goldman added, money flowing into Canada has slowed markedly, and interest rates are low, and expected to stay there.

“It is also important to highlight that the Canadian dollar remains clearly overvalued on our … fair value model,” the bank said.

“Combined with the weak current account position, there are therefore good fundamental reasons for a weaker CAD,” it added, referring to the currency by its symbol.

Goldman’s forecast for the loonie, as Canada’s dollar coin is known, is lower than most. Chief currency strategist Camilla Sutton of Bank of Nova Scotia, for example, projects the dollar, which has been hovering just below 95 cents U.S. of late, will sink to 93 cents by mid-2014, and then pick up again.

The current account, the broadest measure of international trade, stood at $15.5-billion in the third quarter of the year, down somewhat from the $15.9-billion of the second quarter," The Globe and Mail's Barrie McKenna reports today.

That second-quarter reading was revised from the initial measure of $14.6-billion, so it's not exactly as it seems.

"While today's report suggests the current account actually improved on a quarter-over-quarter basis, the level, at a few ticks above 3 per cent of GDP, is wide by any measure and a reminder of the currency's vulnerability to foreign capital flows," said economist Emanuella Enenajor at CIBC World Markets.

"We would need to see an improvement in Canada's resource product prices and a measured pick-up on global growth in order to see the current account deficit narrow ahead."

The deficit in the trade of products narrowed slightly to $2.2-billion as exports rose more than imports. While a trade surplus with the United States widened on energy and auto exports, the deficit with other countries similarly fattened as exports fell.

Where services are concerned, the deficit narrowed by some $300-million to $5.9-billion, partly because tourists and other travellers spent more in Canada.

Investment by foreigners in Canadian markets rose, largely because of their interest in stocks.

"Nevertheless, foreign investment in Canadian securities has slowed considerably in 2013 compared with levels observed in the previous four years, though the composition of this activity has evolved in recent years."

Foreign direct investment in Canada slowed for the second consecutive quarter while that by Canadians rose to almost $21-billion, largely on merger and takeover deals.

"The large current account deficit just means that Canada remains dependent on capital inflows," said senior economist Krishen Rangasamy of National Bank of Canada.

"The bulk of those inflows are coming in the form of easily-reversible portfolio investments, which leaves the Canadian dollar vulnerable, particularly if there is a negative turn in sentiment by foreign investors."

So what’s the outlook?

“Canada’s current account gap of just over 3 per cent of GDP is manageable, but continues to suggest the Canadian dollar is overvalued,” said senior economist Robert Kavcic of BMO Nesbitt Burns.

“A stronger U.S. economy and softer loonie should help narrow the gap somewhat in 2014.”

Rents headed for decline?
There are signs that rents in Toronto’s condo market are on the verge of decreasing, at a time when new landlords are already dealing with low returns, a new report says.

The idea that the condo rental market might be tipping in favour of renters runs counter to the general belief among economists and industry experts that the condo rental market is strong, and that rents are rising, The Globe and Mail's Tara Perkins reports.

“We believe the rental market may be at an inflection point,” says the report by Veritas Investment Research analyst Ohad Lederer. “Our weekly review of condo ‘for rent’ postings on craigslist.org indicate an approximate doubling of the number of condo listings in late 2013 versus late 2012.”

Toronto’s condo market, with its abundance of cranes and construction sites, has long been a concern for policy makers in Ottawa. If it is indeed at an inflection point, that could have serious implications for the market.

CPPIB in India
The Canada Pension Plan Investment Board is making its first foray into India’s real estate market in a new joint venture as the fund widens its global expansion, The Globe and Mail's Bertrand Marotte reports.

CPPIB and Shapoorji Pallonji Group said today they've formed a strategic alliance to acquire office buildings in India’s major cities.

The giant pension fund portfolio manager will own 80 per cent of the venture with an initial equity investment of $200-million (U.S.).

The move is the latest in a series of real estate investments around the world as CPPIB, manager of the assets of the Canada Pension Plan, seeks to diversify its risk as well as find faster growth opportunities in emerging economies.

Carney pulls back
Wow, you’d almost think Mark Carney was back in Canada again.

The Bank of England’s new governor surprised the country today by pulling back on a mid-2012 plan to spur mortgage borrowing, acting to prevent a housing bubble amid a surging market.

“We did not see an immediate threat coming from the housing market but we are concerned about the prospective evolution of the housing market,” Mr. Carney told reporters in London, according to Reuters.

“The concern is where this could go. We definitely see some short-term momentum.”

Mr. Carney, remember, spent forever in Canada urging consumer to change their naughty ways and scale back their record debt levels, going so far as to threaten an interest rate hike if they didn’t.

“The fact that it has chosen to act so early tells us two things,” Brian Hilliard of Société Générale said of the Bank of England’s move.

“First, recent housing market developments are already giving grounds for concern but, second, the bank is using its macroprudential tools, rather than its monetary policy tools, to control the market. This should take some of the pressure off … to raise rates.”

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