Canada won't be immune to the mounting fears over the health of the global economy despite the country's strong economy and sound fiscal policy, experts and officials say.
As Asian stock markets tumbled overnight, the European Central Bank buys up Italian and Spanish bonds in an attempt to calm jittery investors across Europe, and U.S. markets prepare for losses on Monday morning, there were several warnings that Canada is not exactly a safe haven amid the ongoing financial turmoil. The fears seemed justified as the Canadian dollar slid by almost a full penny on opening.
"In this environment, commodity prices likely remain soft and the Canadian dollar is vulnerable and extremely volatile," wrote BMO Financial Group chief economist Sherry Cooper in a commentary on Sunday. "Our stock market has taken a beating and it's probably not over."
The credit rating agency Standard and Poor's downgraded U.S. debt for the first time in history late on Friday, from AAA to AA+, and investors have been bracing themselves for Monday morning's North American open ever since. Although the ECB's moves were having some temporary stabilizing effects in some European markets, U.S. stock futures fell sharply and gold futures were up as investors sought safe havens as they waited for what was likely to be a grim Monday.
Although the U.S. debt downgrade was hogging headlines over the weekend, most analysts have said the implications of the move are more psychological than practical, with most investors prioritizing fears over the debt crisis spreading through Europe.
In a statement late Friday, Finance Minister Jim Flaherty warned that Canada was not immune to financial fallout from the debt downgrade in the U.S., nor to the debt crisis in Europe, where policy makers were struggling to address systemic economic problems in Italy and Spain.
"Over the past few days, financial markets have reacted to the uncertainty generated by concerns about U.S. growth and the continuing debt problems in Europe," Mr. Flaherty said. "As we have always said, Canada is not an island. We are a trading nation, with about a third of output generated by exports and deep linkages with the US economy. The global economic recovery remains fragile and this uncertainty may eventually impact Canada."
Mr. Flaherty added that, "Our financial systems remain strong, in part reflecting ongoing sound supervision. Moreover, we have a range of measures to respond to possible financial sector disruptions." He also pointed to the employment numbers that came out on Friday as evidence that the North American recovery was not sliding backward into a recession.
BMO Financial Group's Ms. Cooper, however, sees several areas of the Canadian economy that could be impacted by the ongoing problems. Although commodity price shifts and fluctuations in the Canadian dollar were not necessarily bad for the Canadian economy, she noted, there is likely to be effects not just on the Canadian stock market, but elsewhere. She writes that the housing markets of Toronto and Vancouver "might be vulnerable," and that Prime Minister Stephen Harper, Bank of Canada governor Mark Carney and Mr. Flaherty can offer little more than soothing words.
"Messieurs Harper, Flaherty and Carney can only counsel Canadians to remain calm, reassert that the domestic fundamentals are good and pressure G-20 leaders to take the necessary actions to avert a crisis," she said.
There was also concern about the Canadian dollar on Monday morning as investors and strategists awaited the opening of the North American markets. RBC Capital Markets' Paul Borean said, "On the whole, I'd say that the Canadian dollar is very much the tail being wagged by the dog" given concerns over the U.S. The dollar fell sharply at the Asian open, as low as $0.9880 to the U.S. dollar. It scraped mid-July lows before it "rebounded strongly," RBC noted.
David Watt, RBC's senior currency strategist, said two key factors are working against Canada's currency at the moment: First, market sentiment has clearly swung against commodities markets, such as Canada's; and second, much of the focus on Monday will be on the debt downgrade in the U.S., which is Canada's largest trading partner.
"We're certainly giving back some of the gains we've seen over this year," Mr. Watt said in an interview.
"The Canadian dollar was volatile and lost ground overnight...[t]he short term Canadian dollar technicals are negative, while the long term technicals are positive," writes Rahim Madhavji of Knightsbridge Foreign Exchange in a note to clients, adding that today's range for the loonie was $0.9800 to $0.9900. "Weak oil, equities, and sentiment should put pressure on the loonie in the short term. Look for stimulus in jobs or (quantitative easing) to potentially be a next step for the US and this has generally boosted the loonie, but this could take some time to implement, if any."
Also on Monday, the Organization for Economic Cooperation and Development (OECD) released new data on composite leading indicators - an index of various economic factors used to gauge macroeconomic trends - that pointed to a possible slowdown in Canada, as well as a possible peak in the U.S., and for OECD member nations, as well. It was simply more bad news, indicative of a broader economic slowdown as the debt crisis in Europe and U.S. debt downgrade intensify fears of a double dip recession.
"Composite leading indicators (CLIs) for June 2011, designed to anticipate turning points in economic activity relative to trend, continue pointing to a slowdown in activity in most OECD countries and major non-member economies," the Paris-based organization said in a news release on Monday. "Compared to last month's assessment, stronger signs of turning points in growth cycles have emerged in the United States, Japan and Russia. The CLIs for Canada, France, Germany, Italy, the United Kingdom, Brazil, China and India continue pointing to slowdowns in economic activity."