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Senate Committee on Foreign Affairs Ottawa, 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…

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Senate Committee on Foreign Affairs Ottawa, Canada

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  1. Senate Committee on Foreign AffairsOttawa, Canada George Vasic Equity Strategist and Chief Economist UBS Securities Canada Inc. 22 October 2003

  2. 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

  3. Current context… …Appreciation has occurred from a position of undervaluation Source: Bloomberg, Statistics Canada, Bank of Canada, UBS

  4. Current context… …Canadian economy is structurally stronger and better balanced than the U.S. Net Foreign Liabilities as a % of GDP Canada U.S. Source: Statistics Canada, Bureau of Economic Analysis, UBS

  5. Current context… …Rapid rise will spur adjustment Currency-adjusted relative unit labour costs in manufacturing sector Source: OECD

  6. 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

  7. Current context… …Strong North American integration overstates likely impact in model simulations Canadian import content of exports by sector Source: Statistics Canada

  8. Current context… Longer term, more appropriately valued currency could reduce our goods / services trade imbalance. Current account balance as a % of nominal GDP Source: Statistics Canada

  9. 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

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