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Canadian dollar. (Jonathan Hayward/The Canadian Press)
Canadian dollar. (Jonathan Hayward/The Canadian Press)

Business Briefing

Why keeping the Canadian dollar would be dicey for a sovereign Quebec Add to ...

These are stories Report on Business is following Thursday, March 13, 2014.

Follow Michael Babad and The Globe's Business Briefing on Twitter.

Quebec and the loonie
Keeping the Canadian dollar as its currency would be nowhere near as easy for an independent Quebec as the Parti Québécois leader’s comments would suggest.

First and foremost is the fact that a sovereign Quebec would not have a sovereign monetary policy, and thus would be beholden to the Bank of Canada, which, in the case of the central Canadian province, is a dicey prospect.

“This is a similar issue that has arisen in the Scottish independence vote: The reality is, a country can ‘use whatever currency it wants,” said chief economist Douglas Porter of BMO Nesbitt Burns.

“The much stickier issue is whether they then have any say in that currency’s underlying monetary policy – that is the real debate.”

But the issues go far deeper than that.

To recap, Parti Québécois leader Pauline Marois is in the midst of an election campaign she says could lead to a referendum on sovereignty, depending, of course, on the outcome of the vote.

Such a referendum would not be the first for the separatist political party, which lost twice before on such a vote.

As The Globe and Mail’s Rhéal Séguin and Les Perreaux report, Ms. Marois said yesterday that a sovereign Quebec would hold onto the loonie, as Canada’s dollar coin is known, and seek a seat at the Bank of Canada’s policy-setting table.

Quebec is in a unique situation, hurt by the woes of the manufacturing sector and seen as one of the country’s weaker provinces on a fiscal basis at this point. It did, however, pledge to balance its books within two years.

“There are many countries using the currency of another around the world and hence no particular problem for Quebec to use the Canadian dollar in this hypothetical scenario,” said senior currency strategist Sébastien Galy of Société Générale.

“The problem is that policy would be set ex ante Quebec’s more traditional economy and more centred on Alberta’s energy-dependent economy, that is unlikely to favour Quebec,” he said.

“Furthermore, Quebec’s trade position has been in a deficit for a while, indicating that it is losing saving vs. the rest of the world, reducing the appeal of the CAD as a store of value,” he added, referring to the Canadian dollar by its symbol.

All things being equal, Mr. Galy said, the Canadian dollar would, hypothetically, be stronger when the dust settles.

“Again, this would neither help Quebec nor help Ontario, Nova Scotia and more traditional parts of the Canadian economy,” said Mr. Galy.

“Quebec brings a balance to the product line offered by Canada which has isolated it from the worst of the days in the carry trade. Australia, New Zealand or Norway were never so lucky.”

As to a seat at the table, that would of course be a political decision. But one has to question whether the government would agree.

Then there’s the issue of its lack of any control over a currency should it want to devalue to juice its manufacturing-based economy.

In his report on Quebec’s latest budget, Warren Lovely of CIBC World Markets noted how the province was benefitting from the recent erosion of the Canadian dollar, and how it forecast economic growth this year of 1.9 per cent.

“With a less punishing fiscal drag in key advanced nations and emerging economies likely doing better, provincial exporters appear positioned to build on last year’s gains,” Mr. Lovely said.

“The Canadian dollar is expected to average a snick less than 90 U.S. cents this year, providing a shot in the arm for the province’s outsized manufacturing sector.”

The dollar, however, is expected to rebound, which would leave a sovereign Quebec at its mercy with no ability to manipulate the currency.

Quebecor profit up
Quebecor Inc. saw its fourth-quarter profit beat analysts’ expectations on marginally higher revenue, The Globe and Mail's Bertrand Marotte reports.

The Montreal-based media and telecommunications company said today earnings on an adjusted basis were $68-million or 55 cents a share, up from $52.3-million or 42 cents a year earlier. The 55-cents-per-share return beat analysts’ average estimate of 52 cents.

Revenue increased $5.7-million to $1.12-billion.

On an non-adjusted basis, profit reached $43.4-million or 35 cents a share in the fourth quarter, up from $7.1-million or 6 cents.

China in focus
China’s economy has been the source of investor angst for some time now.

And today’s data, coupled with comments from Premier Li Keqiang, aren’t helping.

Industrial production in China expanded by almost 9 per cent in the first two months of the year, an enviable number but short of what economists were expecting. Retail sales also fell shy.

“Note that the sizeable shortfall in retail sales may reflect the effect of the government’s recent anti-corruption drive, which has restrained demand for big ticket and some luxury items,” said Peter Buchanan of CIBC World Markets.

“Separate figures showed home sales slowing in the first two months of the year. Taken together, today’s numbers suggest the softest start to the year since at least 2009, when the economy expanded at a rate of just over 9 per cent.”

Separately, Reuters reports, the premier warned at a news conference today that China’s economy faces challenges this year.

The government’s target for economic growth this year is 7.5 per cent, and, said Mr. Buchanan, Chinese officials likely expected today’s numbers when they unveiled that target last week.

“With the economy likely slowing more  than the government would prefer, today’s numbers heighten the chance of further steps to promote growth, with a reserve ratio cut among the measures being talked about,” he added.

Bank of England moves on bank bonuses
Canada’s bankers certainly appeared fond of Mark Carney. But one wonders what their British counterparts might be saying today.

In its drive to stop the financial services industry from taking too-big risks, the Bank of England is proposing to claw back the bonuses of bankers, for up to six years after the fact, if they went off the rails.

There will be two months of consultation on the proposal, which would then come into effect next January.

The clawback could be used when there’s “reasonable evidence” of misbehaviour or material error, when the bank is hurt by a “material downturn” in performance or when it “suffers a material failure of risk management,” said the central bank, which Mr. Carney now heads after leaving the Bank of Canada.

“The Bank of England already has powers to require firms to stop payment of unvested bonuses, called malus; the proposals in today’s document would represent a further strengthening of the remuneration code,” the central bank said.

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