Transcript PresShow template - Parliament of Canada

Senate Committee on Foreign
Affairs
Ottawa,
Canada
George
Vasic
Equity Strategist and Chief Economist
UBS Securities Canada Inc.
22 October 2003
The Obvious:
Rises / falls in the Canadian dollar are bad /
good for trade and the economy,
all else equal…
But…
Depends on why the currency is moving
Depends on the monetary policy reaction
Depends on expectations of future movement
1
Current context…
…Appreciation has occurred from a position of undervaluation
120
$0.80
Correlat ion = 0.92
110
$0.77
$0.74
100
$0.71
$0.68
90
$0.65
80
$0.62
1996 1997 1998 1999 2000 2001 2002 2003 2004
TW mat erials price index (lhs)
CAD (rhs)
Source: Bloomberg, Statistics Canada, Bank of Canada, UBS
2
Current context…
…Canadian economy is structurally stronger and better balanced
than the U.S.
Net Foreign Liabilities as a % of GDP
50%
25%
20%
15%
10%
5%
0%
(5%)
(10%)
(15%)
40%
30%
20%
10%
1961
1971
1981
1991
2001
Canada
1982
1987
1992
1997
2002
U.S.
Source: Statistics Canada, Bureau of Economic Analysis, UBS
3
Current context…
…Rapid rise will spur adjustment
Currency-adjusted relative unit labour costs in manufacturing sector
130
125
120
115
110
105
100
95
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003
Source: OECD
4
Current context…
…USD is depreciating
Fed study of 25 episodes of current account adjustment
from 1980 to 1997 among industrialized countries
showed:
“sustained surge in export growth is the more important
force [than declining imports]”
 Canadian companies stand to benefit from higher U.S.
exports.
Source: Caroline Freund, Current Account Adjustment in Industrialized Countries, International
Finance Discussion Paper, No. 692, Federal Reserve, December 2000
5
Current context…
…Strong North American integration overstates likely impact in
model simulations
Canadian import content of exports by sector
70%
56%
39%
36%
35%
34%
34%
Petroleum &
Coal
Metals
40%
Leather/Plastics
42%
Textiles &
Clothing
45%
50%
Other manuf.
goods
60%
M&E
Electronic
equip.
Motor
vehicles/parts
30%
Source: Statistics Canada
6
Current context…
Longer term, more appropriately valued currency could
reduce our goods / services trade imbalance.
Current account balance as a % of nominal GDP
9%
6%
3%
0%
(3% )
(6% )
(9% )
1970
1976
1982
Goods
1988
1994
2000
Non-Goods
Source: Statistics Canada
7
Conclusions
Relative demand more important to trade
implications than exchange rate
Rise to 70 cents was welcome
Productivity reaction key to longer term virtuous
circle
8