Canada is one of few healthier financial systems in the West that weathered the 2008 financial crisis, without having to front big banks bankruptcy and government funding like some of its counterparts.

Canada's financials, compared that of the US, suffered less and rebounded stronger in its track of recovery for a number of reasons. First, the country's solid banking industry serves as a powerful backup for local corporations in loan financing during the aftermath of the crisis; second, Canada is propelled by natural resources and strong corporate capital account, which in turn benefit local economic operation and attract capital inflow. The acquisition of the local fertilizer company Potash is a typical example of the attractiveness of Canadian assets.

That said, Canada is a close neighbour and trading partner of the US, hence the economic situation of the former can be largely influenced by the latter. The economic slump in the US in the 2^nd and 3^rd quarter of 2010 depressed the economic activity in Canada. This worried the Bank of Canada, and in consequence it stopped hike rates after the last hike of 1% in September 2010. The track of CAD appreciation then came to a halt, and investors has seen a range bound in CAD price over the past months – a mere 4% volatility from October to December 2010.

There is a turnaround in the US economic figures recently. Since the end of the 2^nd quarter of 2010, the USD has been falling in anticipation of a 2^nd round of Quantitative Easing (QE2), which promotes the country's exports. In addition, Obama's government proposed a series of policies after the mid-term election, including tax incentives. The policies are well received with expectation of a boost in domestic consumption and corporate capital expense. Generally, it is also expected by the market it can stimulate the US economy in the short term, and bring more than 1% growth to the US economy in 2011.

Given the two countries' close trading ties, the Canadian economy was weakened by economic slowdown in the US in 2010. On the bright side, if the US economy becomes stronger going into 2011, Canada could be the major beneficiary. Canada, a country with solid financial system, stronger job market and ample natural resources that attracts foreign capital, is set to hike rates ahead of the US. If the US consumption heats up, chances of a rate hike in Canada would be higher than the US as central bank would look into the need to curb potential inflation risks. Investors should expect a stronger CAD as we set foot on 2011.

Source:

Investment Product Specialist Team Product Management, Global Treasury Markets (Investment) Bank of China (Hong Kong) Limited

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