Canada's international assets were $1,419.8 billion at the end of the third quarter, down 3.3% from the second quarter. Meanwhile, international liabilities edged up to $1,504.1 billion. As a result, Canada's net foreign debt position expanded to $84.3 billion at the end of the third quarter, reflecting the continued appreciation of the Canadian dollar as well as a larger current account deficit.
Changes in exchange rates continued to dominate the change in the value of international assets and liabilities in the third quarter. The revaluation of Canada's foreign assets and liabilities from the appreciation of the Canadian dollar accounted for just over 90% of the $49.5 billion increase in the net foreign debt position in the third quarter, and the financing of an expanded current account deficit largely accounted for the remainder of the increase.
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Canadian dollar appreciation lowers value of international assets more than liabilities
The Canadian dollar appreciated strongly against all major currencies in the third quarter. The domestic currency gained 8.6% against the US dollar, 1.2% against the Japanese Yen, 4.1% against the Euro, and 11.8% against the British Pound.
These exchange rate changes had a much larger impact on Canada's international assets than on international liabilities. There was an $86.8 billion decline in the value of foreign currency denominated international assets and a $42.1 billion reduction in the value of international liabilities. Most of Canada's foreign assets are denominated in foreign currencies while less than half of our international liabilities are in foreign currencies.
Note to readers
The international investment position presents the value and composition of Canada's foreign assets and liabilities to the rest of the world. Canada's net international investment position is the difference between these foreign assets and liabilities.
The excess of international liabilities over assets can be referred to as Canada's net foreign debt. The excess of international assets over liabilities can be referred to as Canada's net foreign assets.
The valuation of the assets and liabilities in the international investment position are measured at book value, unless otherwise stated. Book value represents the value of assets and liabilities recorded in the books of the enterprise in which the investment is made.
Currency valuation
The value of assets and liabilities denominated in foreign currency are converted to Canadian dollars at the end of each period for which a balance sheet is calculated.
When the Canadian dollar is appreciating in value, the restatement of the value of these assets and liabilities in Canadian dollars lowers the recorded value. The opposite is true when the dollar is depreciating.
The value of Canadian direct investment activity abroad swamped by the appreciation of the Canadian dollar
Despite a pickup in outward direct investment activity in the third quarter, the value of Canadian direct investment assets was down $25.3 billion (-4.0%) to $601.4 billion by quarter end. This resulted from a $43.3 billion revaluation of foreign currency denominated direct investment assets, as the Canadian dollar strengthened substantially.
On the liability side, transactions led to an $11.5 billion increase in foreign direct investment in Canada. The overall impact was a reduction in the net foreign direct investment asset position to $85.6 billion.
Canadian dollar appreciation also lowers domestic valuation of foreign security holdings
Canadian investors removed $5.5 billion from their holdings of foreign securities in the third quarter, while currency revaluations lowered the value of these holdings by another $25 billion.
Non-resident investors added a further $19 billion of Canadian securities to their portfolios in the third quarter.
This increase in liabilities was more than offset by a downward revaluation in Canadian foreign currency denominated liabilities. As a result, the decline in Canadian foreign assets was larger than that for Canadian liabilities held by non-residents, and the net foreign liability position on portfolio securities widened further.
Large increase in Canada's international official reserves does not affect international investment position
Strong activity in other assets was primarily a reflection of new allocations by the International Monetary Fund of Special Drawing Rights. The allocation added $9 billion to both international official reserve assets and to other liabilities in the third quarter, with no effect on the net international investment position.
Large inflows of foreign currency deposits in the third quarter were offset by the revaluation effect of the appreciation of the Canadian dollar.
Currency revaluation effect offsets the gains in foreign equity markets
Canada's overall international investment position can also be calculated with assets and liabilities of tradable securities valued at market prices.
By this measure, the net foreign debt position also rose, going to $47.2 billion at the end of the third quarter. Canadian assets were up 0.6% to $1,704.1 billion while liabilities rose 2.9% to $1,751.3 billion, even as foreign equity markets rallied more than Canadian equity markets during the quarter.
The large gains in Canadian holdings of foreign equity assets were dampened by losses resulting from the appreciation of the Canadian dollar during the quarter.
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