The Impact of a US Slowdown

The latest move in the Canadian dollar has befuddled many investors because the Canadian economy has traditionally been very sensitive to US economic growth. It is estimated that Canada exports 80 percent of their goods to the US, which makes it logical to assume that a slowdown in US demand would translate into a slowdown in Canadian exports. However over the past few years, Canada has become less reliant on US demand as the country’s vast oil resources begin to attract the attention of resource hungry countries like China.
Since Canada discovered a new source of oil after the reclassification of their Alberta oil sands to the economically recoverable category, their geopolitically turmoil free status has made them a very attractive provider of oil. Also, over the next 3 years, China’s oil import needs are expected to double and match that of the US by 2030. With little oil resources of their own, China has become a major buyer of oil on the global markets. This has helped the Canadian economy become more immune to the economic stability which may be part of the reason why Canadian data has been consistently surprising to the upside while US economic data has seen nothing but back to back disappointments. In the month of August, when the subprime crisis began to unfold, IVEY PMI actually jumped from 54.6 to 58.5, indicating increased manufacturing activity. During the same month the US lost 4k jobs while Canada added 23.3k. Manufacturing shipments continue to remain strong while net foreign purchases of Canadian securities increased for the first time in 3 months. This will keep the Bank of Canada on hold for the remainder of the year, which comes in stark contrast to the US Federal Reserve who is expected to lower interest rates by as much as 75bp this year.