Citing strong third-quarter bank earnings released last week and a housing market that continues to defy doomsayer expectations, the pro-Canada side is claiming victory, so far.
“The deafening silence you hear … is the sound of the short-Canada crowd gone quiet,” says BMO Capital Markets senior economist Robert Kavcic in a recent note.
The battle heated up in the spring when the net value of short positions against the Canadian dollar hit a record. At the same time, high-profile U.S.-based hedge fund managers were talking up their decisions to short Canadian banks, predicting a drop in profits based on a suspected plunge in Canada’s housing market.
The short sellers make money by borrowing an investment they expect to drop in price, then buying it back at a lower price.
That strategy sent a handful of Canadian economists and investors to the front lines armed with data that Canada’s economy was doing just fine – in fact better than the U.S.
“We’ve already documented at length how Canada’s housing market — the focus of the bears’ finger pointing — has absorbed last year’s round of mortgage rule tightening, with sales and prices pushing higher through the spring,” says Kavcic.
Strong financial results from the banks also pushed the Canadian bank index to a record high, Kavcic noted, “with the sector now even outperforming its much more celebrated U.S. counterpart since early July.”
Canadian stock have also performed well, driven by strong energy prices, which are helping to keep the Canadian dollar at around 95 cents (US), while currencies in emerging markets such as India are plummeting.
“Let’s just say that, while softening, the Canadian dollar is not the rupee, lira or ringgit,” sys Kavcic.
Still, it’s hard to ignore recent data showing foreign investors cut back on their Canadian securities holdings by $15.4 billion in June, the largest drop since October 2007, according to Statistics Canada.
Part of that move is being blamed on the steady recovery of the U.S. economy, as investors turn their focus once again to the world’s largest economy.
That the U.S. is bouncing back can't be ignored, but that also bodes well for the Canadian economy given its close economy and geographic ties.
“On a forward earnings basis, relative valuations are close to normal, as investors are less bullish on Canadian earnings, relative to the U.S., than has been seen over the past decade. Given our outlook for stronger U.S. profit growth through 2014, we would agree with that assessment, even as we give thumbs down to the short-Canada thesis,” Kavcic says.