Economy: Canada

Is Canada a safe haven for your investments? (Part 5 of 12)

Geopolitical challenge with economic consequences: Québec

There has long been a question about the status of Québec in Canada (EWC). The Parti Québécois, a provincial political party in Canada, has advocated for sovereignty for Québec since the late 1960s. Two referendums have already been held on the matter—the first in 1980, when 59% voted against independence versus 40% for it, and the second in 1995, which garnered 49% support for independence against 50% who voted against it.

More recently, the Parti Québécois led a minority government in the province between 2012 and April 2014, when the party was soundly defeated by the Quebec Liberal Party in provincial elections.

The Bloc Québécois party, a separatist federal party with strong informal ties to the Parti Québécois, holds just 2 seats out of the 308 in the Canadian Parliament.

Nevertheless, the possibility of a pro-sovereignty party gaining ground in Canada can’t be ruled out. It remains a lingering issue as long as there are some who support it.

Quebec’s independence has the potential to significantly disrupt the Canadian economy. According to Statistics Canada, the province represents 19.16% of the total GDP (gross domestic product) of Canada.

As a trade-fueled economy, Canada is quite vulnerable to a slowdown in the economies that are its major trading partners. The US (IVV), China (FXI), Japan (EWJ), and the European Union (VGK) are among Canada’s key trading partners. A slowdown in these economies would affect Canadian revenue from energy, cars, and basic materials that make up its major exports.

Currency risk: Depreciating loonie

Currency risk in Canada relates to the depreciating loonie. The “loonie” is the common name used for a Canadian one-dollar coin. The gold-colored coin, introduced in 1987, bears the image of a common loon, a well-known bird found in Canada. On the reverse side of the coin, there’s an image of Queen Elizabeth II.

In the past several years, the loonie soared thanks to rising commodity and resource prices. However, with falling commodity prices, the loonie has reversed direction and has been steadily declining since June 2014. From $1.07 to a Canadian dollar in June 2014, the loonie has depreciated to 1.24 Canadian dollars to $1 in Feb 2015.

The next part of this series looks at another reason contributing to the loonie’s slide.

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