Ongoing worries over the U.S. and European debt crises led to a flood of foreign cash into Canadian securities in May, with net foreign investment hitting a one-year high of $15.4-billion during the month.
A cash surge into Canadian equities and bonds comes as foreigners sold off more U.S. assets than they bought in May, a rare move brought on by a hunt for quality yield. Canada’s cash inflow, however, is more of a shelter tactic for investors, said Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets.
“This is a trend that has been going on since 2008, and it’s a combination of faith in Canada’s strong financial system, as well as the ongoing global debt concerns” he said.
The trend is highlighted in the fact that foreign inflows into Canadian securities have averaged $10.1-billion in the past year, almost triple the 10-year average of just $3.5-billion.
Bank of Canada policymakers are likely to take note of the strong foreign inflows, as the data come ahead of the bank’s interest-rate announcement Tuesday. The bank has voiced concern in previous announcements about the effect Canada’s strong loonie is having on the country’s economy.
Foreign inflows tend to exacerbate the strong loonie’s effects.
Mr. Chandler, however, said the bank is unlikely to sweat too much over the May inflow data.
“What it does is it keeps rates lower than where they otherwise would have been,” he said. “And you could argue that’s making mortgages cheaper, and contributing to too much household debt. But of course they could raise interest rates to offset that somewhat, and they haven’t done so yet.”
Canada’s strong foreign inflow contrasted with an overall foreign net outflow in the United States of US$67.5-billion. That marked the first net outflow since June 2010 for the country, and it easily reversed a US$66.6-billion inflow recorded in April.
Gregory Daco, principal U.S. Economist at IHS Global Insight, said the outflow was a by-product of American investors sniffing out better returns, rather than a sudden loss in confidence in U.S. assets.
“Investors in the U.S. have the opportunity to generate higher yields by investing in more risky assets, but higher yielding assets in other regions of the world, the emerging market would be an attractive destination for investors looking for higher yields,” Gregory Daco, principal U.S. Economist at IHS Global Insight, said.
But Michael Woolfolk, managing director for BNY Mellon Global Markets, cautioned that underlying data suggested foreign confidence in U.S.-denominated assets was indeed starting to sink.
He took particular aim at the data that showed additional foreign funds flowed into U.S. Treasuries in May.
“This is something of a red herring, given that much of this is driven by recycling of petrodollars and Asian central bank intervention proceeds,” he said in a note. “Amidst a continued rally in risky assets this year, U.S. investors have been increasingly moving money overseas in search of higher yield.”
Source: National Post
A cash surge into Canadian equities and bonds comes as foreigners sold off more U.S. assets than they bought in May, a rare move brought on by a hunt for quality yield. Canada’s cash inflow, however, is more of a shelter tactic for investors, said Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets.
“This is a trend that has been going on since 2008, and it’s a combination of faith in Canada’s strong financial system, as well as the ongoing global debt concerns” he said.
Jonathon Rivait / National Post
Bank of Canada policymakers are likely to take note of the strong foreign inflows, as the data come ahead of the bank’s interest-rate announcement Tuesday. The bank has voiced concern in previous announcements about the effect Canada’s strong loonie is having on the country’s economy.
Foreign inflows tend to exacerbate the strong loonie’s effects.
Mr. Chandler, however, said the bank is unlikely to sweat too much over the May inflow data.
“What it does is it keeps rates lower than where they otherwise would have been,” he said. “And you could argue that’s making mortgages cheaper, and contributing to too much household debt. But of course they could raise interest rates to offset that somewhat, and they haven’t done so yet.”
Canada’s strong foreign inflow contrasted with an overall foreign net outflow in the United States of US$67.5-billion. That marked the first net outflow since June 2010 for the country, and it easily reversed a US$66.6-billion inflow recorded in April.
Gregory Daco, principal U.S. Economist at IHS Global Insight, said the outflow was a by-product of American investors sniffing out better returns, rather than a sudden loss in confidence in U.S. assets.
“Investors in the U.S. have the opportunity to generate higher yields by investing in more risky assets, but higher yielding assets in other regions of the world, the emerging market would be an attractive destination for investors looking for higher yields,” Gregory Daco, principal U.S. Economist at IHS Global Insight, said.
But Michael Woolfolk, managing director for BNY Mellon Global Markets, cautioned that underlying data suggested foreign confidence in U.S.-denominated assets was indeed starting to sink.
He took particular aim at the data that showed additional foreign funds flowed into U.S. Treasuries in May.
“This is something of a red herring, given that much of this is driven by recycling of petrodollars and Asian central bank intervention proceeds,” he said in a note. “Amidst a continued rally in risky assets this year, U.S. investors have been increasingly moving money overseas in search of higher yield.”
Source: National Post
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