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Canada: Current Account Deficit Financed by Portfolio Flows

ByThe National Bank of Canada
Published 03/04/2012, 02:09 AM
Updated 05/14/2017, 06:45 AM

It’s now three years in a row that Canada’s current account, the broadest measure of trade, is in deficit. True, last year saw a slight narrowing of the deficit after the 2010 nadir, but at C$48.3 bn (over 2% of GDP) Canada’s annual trade imbalance remains significant. Of course, that means that the Canadian dollar remains highly vulnerable to capital outflows should there be a sudden negative turn in investor sentiment. More so, given that the deficit has been financed in recent years by portfolio flows which can be quite volatile and shortterm in nature. Recall the loonie moving from stronger than parity with the USD last September to weaker than 1.05 in a matter of days, coinciding with divestment from Canadian government bonds. And as today’s Hot Chart shows, running current account deficits has meant borrowing from abroad, causing our net international investment position to deteriorate sharply in the last three years as liabilities (particularly portfolio liabilities) have grown faster than assets. That, incidentally, has reinforced the deficit on the current account with the portfolio investment income deficit more than doubling since hitting a trough in 2007.

While we expect the loonie to remain strong, buoyed in part by the US Fed’s ultra loose monetary policy, expect C$ volatility over the next several years as Canada’s current account balance remains deep in the red.
Canada Current Account Deficit Financed by Portfolio Flows

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