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Is that unusual for market commentaries? They are mostly nonsense.

Canada is a) a smaller economy, b) more dependent on trade. A reduction in US economic activity might well produce an even larger reduction in Canadian economic activity. In fact, a check of the historical record may well show that is is the expected pattern. I don't have access to the stats but my memory of the history of US recessions makes me think that is the case.

This is even before considering that part of the US response to a recession is to become more protectionist and to cut back on imports.

I'm reminded of this post from Felix Salmon's blog. From his post, Bloomberg had said:

The Canadian dollar fell for a fourth day as investors sold commodity-linked currencies on speculation U.S. subprime mortgage losses will slow the world's largest economy.

To which Felix commented:

Yep, the Canadian dollar fell against the US dollar on subprime worries. Or, to put it another way, the US dollar rose on subprime fears.

It made no sense when the loonie was at 62 cents and it made no sense when it was at $1.10, so why would it make sense now?

I think the model that people have in their minds is that a US recession is bad for world commodity prices, and that this is bad for the CAD. Given that commodity supply, esp. in the short run, is pretty inelastic to variations in demand, it seems reasonable to think that weaker world demand will create a negative terms of trade shock for Canada.

Now, it is possible that they're thinking of an even more perverse scenario based not on terms-of-trade effects but on portfolio balance effects. Suppose that (a) the credit crisis in the US increases international market volatility, and (b) as volatility increases, people have a strong preference for US financial assets. I suspect it is possible to construct a formal model in which the worse the US economy gets, the more people want to hold US goverment assets.

I think the market is under valued the US dollar including against the Canadian dollar

Reuters, and the other news rags for that matter, like to see their print. Just becasue most of the time it doesn't make a lot of sense doesn't seem to bother them all that much. It's all part of the game I guess.

At any rate Stephen, you make a valid point.


There is no doubt that fi the US economy wavers, the Canadian economy will feel the aftershock.

It seems like they feel the need to try to explain market variations, when even very savvy investors can only guess.

You also seem to have called in the investing spammers.

Oh, geez. I'll have to shut comments down on this one.

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