Chart of the Week: Canada's Basic Balance

September 10, 2021 | Matt Barasch


Share

As students head back to school, we return to our weekly updates. This week our chart of the week features Canada's basic balance, we update our Covid-19 data and share some thoughts on the markets.

Chart of the Week (COW)

Foreign Direct Investment (FDI), which can be thought of as the amount that foreigners invest in Canada, typically declines in the second quarter of the year largely because demand for oil is lower in the Spring. In fact, FDI is typically -$10bn or so in the second quarter. This year, FDI was -$35bn, which when coupled with Canadians investing more overseas, led to a sharp decline in what is known as Canada’s basic balance. Let’s look at a chart and then continue:

The basic balance is essentially the amount that foreigners invest in Canada (FDI) less the amount that Canadians invest overseas. If Canadians are investing more outside of Canada than foreigners are investing inside Canada, the basic balance will be negative. As a percentage of GDP, the basic balance hit a record low in the second quarter, which has weighed on the Canadian dollar, which has fallen from ~$0.83 to ~$0.79 over the past few months.

RBC FX believes that the basic balance will stabilize as we head into 2022. Despite this, they believe that the Canadian dollar will weaken a bit from current levels with year-end 2022 levels of around $0.77.

Covid 19 Update

This week we will start with an analysis conducted by the N.Y. Times on the Delta outbreak and the risks of breakthrough infections for vaccinated individuals. The Times found that vaccinated individuals had between a 1/5,000 and 1/10,000 chance of contracting Covid on a daily basis with more vaccinated regions less likely to see so called breakthrough infections (when a vaccinated individual contracts Covid) than were less vaccinated regions. To put 1/10,000 in perspective (a more likely level for Canada given our high vaccination rate), it would take roughly 3-months to reach a 1% chance of contracting Covid if an individual were vaccinated.

Further, the Times analysis found that vaccinated individuals had a ~1/1,000,000 chance of contracting a serious (need of hospitalization) case of Covid or ~0.0001% chance. To put this in perspective, an individual has a ~1/86,000 chance of experiencing a fatal dog attack and a 1/250,000 chance of getting hit and killed by a rogue hot air balloon.

Switching gears, while global daily case counts continue to average more than 500k/day, the Delta wave appears to have peaked:

The U.S., which recently crossed 40 million cases (meaning that more than one in ten Americans have been diagnosed with Covid), also appears to have peaked; although, given the lack of mask mandates in many regions and the still low vaccination levels, we acknowledge this may change:

As for Canada, vaccination rates continue to rise:

While we have yet to see a peak in Delta in Canada, with vaccination rates of the eligible population exceeding 80% in many regions, the outlook remains positive.

Market Update

After a strong summer, September has brought some fits and starts. The TSX remains within a couple of percent of an all-time high; however, the Canadian banks have recently declined between 3-5% of their recent highs. Interest rates remain low, which, as we have noted in the past, creates a headwind for banks as the primary source of their earnings comes from net interest margins (NIM). NIM can be thought of as the difference between what banks pay on deposits and what they earn on loans. Interest rates on deposits are tied to short-term interest rates, which are near 0%, while loans are generally tied to long-term interest rates. Early in the year, long-term rates were on the rise as the reopening of the global economy drove optimism; however, Delta has driven another leg down in long-term rates, which has squeezed NIM.

Our outlook for the banks remains favourable and while we would not be surprised to see a bit more near-term weakness, we expect that 2022 will be another good year for their businesses and their stock prices.

Categories

Economy Markets Health