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Peter Power/Peter Power/The Globe and Mail

Globe editors have posted this research report with permission of Gluskin Sheff + Associate Inc. It is today's full version of David Rosenberg's daily economic report, Breakfast with Dave. This should not be construed as an endorsement of the report's recommendations. For more on The Globe's disclaimers please read here. The following is excerpted from the report:

With little fanfare and with no market disruptions, Canada has managed to dramatically brighten the economic outlook with a massive depreciation of the Canadian dollar over the past 12-18 months. Much, if not all, of the decline is likely behind us, but what lies ahead are the positive lagged effects on manufacturing shipments, exports and what all equity investors actually pay for — corporate profits.

Using the traditional Monetary Conditions Index as the benchmark, the decline in the loonie is the equivalent of over a 300 basis point decline in interest rates — that is how powerful this move in the currency has been. Now if the Bank of Canada could ever have engineered such a rate reduction, we'd all be living in Fantasyland since rates would be negative in that event, and we would be finding ways to add exposure to interestsensitive segments of the equity market (consumer cyclical, real-estate).

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But that this stimulus has been accomplished via the exchange rate, the segments of the market that stand to benefit the most and indeed the ones enjoying the most pronounced upward shift in earnings expectations are the sectors that have the greatest orientation in the U.S. market — and the resulting currency translation effects to the bottom line, such as energy, auto parts, capital goods, forest products and transports. ...

Has the loonie's decline had anything to do with a loss of investor confidence over Canadian fiscal prospects as we saw time and again through the 1990s? How can that be the case? Canada is about the only major developed country on track to balance its books in the coming year — and is ahead of schedule. The federal government debt-to-GDP ratio is at the low end of the OECD scale, and even when you tack on the provinces (even the debt addiction region of Central Canada) the total government ratio still rivals Germany at the low end and far below the levels prevailing south of the border.

So what did change in Canada to cause the change in the direction of the Canadian dollar? In two words: Stephen Poloz. The Bank of Canada Governor has been rather vocal over the need for the Canadian economy to rebalance via less reliance on consumer spending and housing and more on exports.

Read the full report here.

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