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Stock Ideas Top Headlines US Dollar and the Canadian Dollar Parity
Stock Ideas Top Headlines US Dollar and the Canadian Dollar Parity 
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Dear Reader, The vote was unanimous: 5-to-0. And, with the swing of a gavel, a United Nations international court settled a seven-year border dispute, handing a tiny Canadian company the rights to a potential $1.35 trillion fortune. |
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| US Dollar and the Canadian Dollar Parity |
| Wednesday, 26 September 2007 | ||||||||
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What happened last week is a culmination of a long-building reality. The Canadian dollar has steadily climbed from an all-time low against the US dollar of 61.79 cents US established on Jan. 21, 2002. That rise coincides with the steep climb for energy-related and other resource commodities. Canada’s economy is deeply rooted in stuff--such as oil, gas, basic and precious metals and wood--that collectively accounted for 13 percent of GDP in 2005. And a global economic boom, fueled largely by growth in Asia, has led to unprecedented demand. Things will probably slow into 2008, but what’s happening in China, India and other less mature but still loudly emerging neighbors will define the 21st century global economy. It may slow down, but domestic consumption is a happy fever. You can keep it down for a while, but it always wants to come back. Pursuing needs is dreary; chasing wants is intoxicating. That the Federal Reserve saw fit to double expectations and cut the fed funds target and the discount rate by 50 basis points rather than 25 is a sign it’s a little more concerned about the next act in the mortgage market tragicomedy. A new wave of adjustable-rate loan resets will crash in the next six months. The Bank of Canada, meanwhile, has kept its equivalent rates stable. As a result, the spread between US and Canadian interest rates widened, making Canada a more attractive place for German, Japanese, American and other foreign investors to put their money. The high Canadian dollar will increase the number of cross-border shopping trips as Canadian consumers come to the US to buy clothes, shoes and electronic gear. Many goods in Canada haven’t been reduced yet to reflect the rising Canadian dollar. The major downside risk for Canada--its dependence on the US economy--is mitigated by the Fed’s determination to keep at least resource spending at high levels. In November 1976, oil prices were at record levels, gold prices had tripled during the past five years, and the Canadian dollar wasn’t packing nearly as much purchasing power on the store shelves as it was on the currency exchanges. That sounds a lot like today. Canada’s federal government has been in surplus for more than 10 years, and the current account is in surplus--2 percent of GDP. The US, as has been well documented, has substantial fiscal and current account deficits on both books. Canada’s twin surpluses provide support for the loonie, support that didn’t exist in 1976. Tax Treaty Changes Canadian Finance Minister Jim Flaherty and US Treasury Secretary Henry Paulson met in Quebec last Friday to sign an updated Canada-US tax treaty. The new agreement includes the elimination of a 10 percent withholding tax on interest payments made by borrowers in one country to lenders in the other.
Canadian tax rules had treated US LLCs as corporations. The new agreement will recognize LLCs as partnerships--flow-through entities that pass earnings to partners to be taxed in partners’ hands--rather than as corporations. US LLCs will no longer face double taxation. This raises interesting questions regarding Canada’s treatment of income trusts. The minority government’s 2007 federal budget essentially eliminated the flow-through benefits of the trust structure by imposing a tax on distributions. Exempting LLCs operating in Canada from Canadian corporate tax seems to contradict the trust decision. The treaty will enter into force once it has been ratified by both the Canadian and US governments. Source Excerpted from : This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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