Canada's international investment position

The value of Canada's assets abroad plunged during the third quarter of 2004 as the Canadian dollar appreciated — mostly against the US currency. The appreciation also caused a decline in Canadian liabilities to the rest of the world. As a result, Canada's net liability to foreign residents (the difference between its external assets and foreign liabilities) rose by 9.2% to $192.9 billion.

The value of international assets fell to $954.9 billion, down $35.4 billion from the second quarter-end level. The dollar, which gained over 5% in value with its US counterpart during the quarter, removed $43.8 billion from the value of these assets.

At the same time, Canada's international liabilities declined $19.2 billion to $1,147.7 billion. The strengthening dollar removed $23.6 billion from the position, more than offsetting all the net transactions during the quarter.

As a result, net external liabilities as a proportion of Canada's gross domestic product (GDP) rose at the end of the third quarter. The ratio, which had been steadily declining from a peak of 44.3% in 1994 to reach 13.7% at the end of the second quarter, rose to 14.7%.

During the third quarter, the Canadian dollar gained ground against the US dollar and also against all other major currencies. It gained 5.4% against the US dollar, 3.5% against the Euro and 6.4% against the Japanese Yen.

Canadian assets abroad decline

The stronger Canadian dollar had its largest impact on the value of Canadian direct investment abroad, which fell by $9.7 billion to $438.1 billion. The exchange rate revaluation removed $21.0 billion from asset values. This more than offset net transactions of $11.1 billion during the third quarter. About one-half of the decline was for assets in the United States.

The combination of weak foreign equity markets in the third quarter of 2004 and the rise of the Canadian dollar translated into a 5.0% decrease in the value of foreign stocks held by Canadians. Canadians made only a small investment in foreign stocks during the quarter. The currency revaluation more than offset this investment, resulting in a decline of $9.7 billion in Canadian holding of foreign stocks to $183.7 billion, the lowest level since the second quarter of 2001.

Canadian holding of foreign bonds increased slightly to $51.9 billion. Canadians bought foreign bonds during the quarter but the strong loony mostly offset these transactions to leave the value of holdings at the end of September little changed.

At the same time, Canada's international reserves reached $44.7 billion at the end of September, the lowest level since the end of 1999. The appreciation of the Canadian dollar was responsible for most of this decline.

Foreign direct investment in Canada increases

After a small decline in the second quarter, foreign direct investment in Canada increased $5.7 billion to a record value of $366.7 billion. Foreign direct investors increased their foreign direct investment position in Canada mainly through short term injections and reinvested earnings in existing subsidiaries.

Foreign holdings of Canadian debt instruments decrease substantially

Foreign holdings of Canadian bonds decreased $10.8 billion to $403.7 billion at the end of the third quarter. At the same time, foreign holdings of Canadian money market paper fell to its lowest level in 17 years (down 12.6% to $18.0 billion). While foreign demand for short-term instruments was lower, the lower value of holdings of Canadian bonds was largely due to the strengthening Canadian dollar.

The largest share offering in Canadian history and a corporate restructuring led foreign investment position in Canadian stocks to its highest level ever at $106.9 billion at the end of September. The S&P/TSX composite index gained over 1% during the quarter.

Available on CANSIM: tables 376-0042, 376-0055 to 376-0057 and 376-0059.

Definitions, data sources and methods: survey number 1537.

The third quarter 2004 issue of Canada's International Investment Position (67-202-XIE, $23/$51) will soon be available.

For general information, contact Client Services (613-951-1855; infobalance@statcan.gc.ca). To enquire about the methods, concepts or data quality of this release, contact Éric Simard (613-951-7244) or Christian Lajule (613-951-2062), Balance of Payments Division.