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Foreign traders stumped by nation of Quebec

ROMA LUCIW
Wednesday, November 29, 2006
Prime Minister Stephen Harper's ambiguous motion to recognize the Québécois as a nation has not only triggered a fractious debate within Canada, but likely left some foreign traders scratching their heads.

U.S. investment newsletter writer Dennis Gartman said Mr. Harper's move is “a very symbolic fig leaf tossed to the Separatists in Quebec, who had long ago fallen out of the public's eye and whose influence had been rendered all but non-existent.”

Nevertheless, Mr. Gartman described the move as “utterly confusing,” particularly for foreigners looking to invest in Canada.

“The signals sent to foreign investors can only be confusing beyond belief, for if we are confused, and we think we watch Canada political developments as closely as anyone outside of Canada, we can only wonder what the money managers of Stuttgart, of Hong Kong, of Adelaide must be thinking,” he wrote in his Gartman Letter.

On Monday night, the House of Commons passed Mr. Harper's resolution calling the Québécois “a nation within a united Canada.” Mr. Harper's Intergovernmental Affairs Minister, Michael Chong, resigned in protest on the grounds that the move will bolster the separatist cause and confuse Quebeckers in any future debate on sovereignty.

Bloc Leader Gilles Duceppe claimed victory in the aftermath of the vote, while Mr. Harper said he was merely granting Quebeckers the respect and reconciliation they are looking for. The political debate over just who is Québécois continued to rage on Tuesday, with Quebec Premier Jean Charest asserting that everyone who lives in Quebec is part of the Québécois nation.

Kathy Lien, chief currency strategist with FXCM in New York, said she has been keeping an eye on the Quebec debate. “I'm really still not clear about how this nation thing will progress,” she said, adding that the loonie is already under pressure from lower oil prices and slowing economic growth.

The Canadian dollar fell 0.55 of a cent (U.S.) to 87.91 cents Wednesday, even as Statistics Canada said the current account surplus unexpectedly widened to $5.1-billion (Canadian) in the third quarter.

Economists at National Bank said Wednesday the loonie's long-term fundamentals have received a boost from Ottawa's plan to eliminate net government debt and establish the lowest tax rate on new business investment among the G7 countries.

David Powell, a currency analyst at IDEAglobal in New York, said investors were more focused on the recent weakness in the U.S. dollar and on monetary policy. In his opinion, the Quebec as a nation motion seems more a matter of semantics than anything else.

"However, the worry moving forward is whether this will lead to increasing calls for separatism," Mr. Powell said. "Going through another referendum on separatism would certainly upset the currency markets -- and it could be another calamity for the Canadian economy."

No one is expecting this will trigger another Quebec referendum on sovereignty. Such an event would not only pressure the loonie, but could trigger widespread selling of Canadian equities, Mr. Powell said. "For the moment, it's not a big story here. But it has the potential to become a big story."

Harry Koza, a senior analyst at Thomson Financial, said Quebec bonds have not reacted to the political debate. "When you get separatism rearing its ugly head, like when the 1995 referendum was on, Quebec spreads tend to widen," he said.

International interest in Ontario and Quebec ten-year bonds has been solid in the last week, since Government of Canada bonds pay interest on Dec. 1. "All that cash has to get put back to work ... and is flowing through to the provincial bonds," Mr. Koza said.


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