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Canada's economy is on a roll and its underlying strength is primarily a commodities story. The main protagonists are uranium and oil, says Jody Clarke in a two-part series from our U.K. affiliate, MoneyWeek Magazine.Those commodities and more are causing investors to see green in the Great White North.
[Editors Note: The First of Two Parts. Part Two Runs Tomorrow.]
If you're planning to send Christmas presents to Canadian relatives this year, the Canadian postal service has a simple warning for you: "Mail your parcels early!" says Paula Shore, an official with the Canada Border Services Agency in Vancouver, B.C.
She's not joking. Delays are being reported across the country's postal network, with the three biggest international mail-sorting centers – Montreal, Toronto and Vancouver – all at a choking point. Shifts have been added, and overtime extended, as Canada Post and the Border Services Agency struggle to deal with a 14% year-over-year surge in volumes through to September.
Canada's mailbag problems have nothing to do with strikes, competition, or rural post-office closures. In fact, the country has become a victim of its own economic success.
The Canadian dollar – known colloquially as the Loonie – is trading at a 50-year high of $1.07 against the U.S. dollar, making it cheaper for Canadians to order goods online from the United States than to buy them locally. That fact has led to a surge in U.S. imports and a raft of extra parcels and mail to deal with. Retailers, who stocked up on goods many months ago when the U.S. dollar was far stronger, are now stuck with shelves of unwanted stock. In some cases, retailers are even trying to attract shoppers by slapping signs promising "American Prices" on their shop fronts.
Although it may not feel like it to those local retailers, Canada's currency is doing well because the nation's economy is booming. Sure, it's "going up by default against a weakening dollar," like almost every other currency in the world, says Adam Cole, a senior currency strategist at the Royal Bank of Canada (RY).
But the underlying strength of the Loonie "is primarily a commodities story," Cole noted. The reason: The world is growing – driven mainly by expanding urban populations in Asia, and China in particular – and it needs an unprecedented amount of raw materials to do so, he said.
Commodities Fueling Growth
That's great news for Canada since, when it comes to commodities, the country is an absolute Aladdin's cave. Canada is home to the largest oil reserves outside the Middle East, and boasts the second-biggest natural gas deposits. Its miners are world leaders, conducting 40% of the world's mining operations, making the U.S. neighbor to the north one of the world's largest producers of zinc, lead and copper.
Of course, when you buy your nickel or potash from Canadian mines, or your wheat and beef from that country's Midwest prairie region, you have to pay for the purchase in Canadian dollars. That means you must first sell your U.S. dollars, or British pounds Sterling, or Chinese Yuan, and then buy loonies – an oft-repeated process that pushes up the currency's relative value. And with oil, gold and most other commodities carrying stratospheric prices, the rest of the world has to pay top dollar for the minerals and energy it buys from Canada.
The net effect of these global financial transactions means that Canada is blessed with something rarely seen in a modern-day developed economy – a budget surplus. In the first five months of the current fiscal year, Canada's surplus jumped 21% from the same period a year earlier, to $9 billion (C$8.68 billion), according to the country's Finance Department.
And the commodities boom has also created a jobs bonanza. The U.S. economy created twice as many jobs as expected in October, a pleasant surprise for many who'd been expecting a slump. North of the border, however, the Canadian economy added 63,000 jobs, roughly five times the number that had been expected. The jobless rate in Canada for October was 5.8%, a 33-year low, and a marked decline from the 5.9% reported for September.
For now, it appears Canada is sound enough to ward off much of the spillover impact of a U.S. recession, should the American economy sputter and stall.
"I'm not particularly optimistic about the U.S., but I don't think the Toronto Stock Exchange is really about the U.S. anymore," Jeff Rubin, chief economist and chief strategist at CIBC World Markets Inc., told Reuters.
Although 75% of Canadian exports currently go to the U.S. market, more than half of its exports are commodities. [That ratio is actually in decline, although Canada remains the No. 1 U.S. trading partner, according to the U.S. Census Bureau].
"What we're seeing is strong global growth that no longer seems to be dependent on the U.S., and that's what allows the Canadian market and, indeed, the broader Canadian economy, to have the measure of independence from the U.S. that it didn't have in past cycles," CIBC's Rubin said. "It may be true that Canada sells all of its oil to the United States, but the price at which it does so depends on what's happening in global oil markets."
The bottom line: The fact that Canada's commodities are in such demand means that Canadian commodity stocks are promising investments, worth closer study by investors looking to capitalize on global growth. Canada may also be something of a safe haven for investors looking to diversify away from the U.S. market and fears that the U.S. economy is recession-bound.
In part two of this series, we'll outline precisely which commodities are fueling the Canadian economy, and tell you which companies investors will want to consider popping into their portfolios.
[Part Two Will Appear in Tomorrow's Issue of Money Morning.]
News and Related Story Links:
- Money Morning Investment Analysis:
With Oil, Uranium and Gold, There's Nothing Crazy About This Canadian Loonie Tune.
- Money Morning Investment Report:
Two "CanRoy" Investments for the Oil and Gas Boom.
- Money Morning News:
Canadian Telecom Telus Misses Third-Quarter Estimates, Even With a 28 Percent Gain in Profits.
- U.S. Census Bureau:
Top 10 Countries With Which the U.S. Trades (September 2007 Statistics).