Would It Be a Loonie Move to Adjust Your Portfolio Before Ottawa’s Austerity Budget?

Some may recall the raucous Question Periods during Paul Martin’s brief, 2-year minority parliament—the first since 1980—when he served as Canada’s 20th prime minister. Or his tenure as finance minister in the 1990s, when Ottawa’s deficits came under control.

The spending had grown so out of control that Standard & Poor’s downgraded Canadian debt in 1992, Moody’s docked us in 1994 and 1995, and the Wall Street Journal even called Canada a “banana republic.” Martin responded with tens of billions in federal spending cuts, eventually balancing the budget by 1997.

I don’t hear Paul Martin’s name mentioned all that much nowadays. But lately, many political pundits are drawing comparisons between Martin and our current prime minister, Mark Carney.

Last week, Carney let it slip that Ottawa’s October budget would include “austerity”. 

It’s a word many of us haven’t heard in a while—perhaps not since Greece nearly pushed the Eurozone off a cliff about 15 years ago (remember the P.I.G.S. crisis?).

However, let’s put “austerity” into perspective. During the fiscal year before the pandemic (April 1, 2019, to March 31, 2020), Ottawa spent about $375 billion. Last year’s expenditures soared to almost $505 billion. Just to bring costs back to 2019 levels, Ottawa would have to cut spending by over 25%. Not likely!

Nevertheless, we had a look at the loonie’s reaction following Martin’s 1995 spending cuts.

Six months after the budget, the loonie appreciated about +3.4% compared to the U.S. dollar. And despite the loonie gaining ground against the U.S. dollar, the U.S. dollar itself was doing pretty good at the time – it even became more expensive by several percentage points compared to the Japanese yen, which was a very large currency (remember there was no Euro until 2000).

In other words, the loonie became a lot more valuable in the six months following Canada’s coast-cutting budget in 1995.

For Canadian investors, this means that October’s budget could capture the attention of foreign investors. Perhaps foreigners might say “it’s time for a second look at Canada”. This means that if the loonie strengthens, just like it did in the mid-1990s, the value of our U.S. stocks will fall in value.

Reach out to us if you would like an assessment about your portfolio’s exposure to currency risk.

-written by Jeff Pollock