After a two-decade low in the second quarter, Canada's net liability to foreign residents increased by $17 billion in the third quarter as the appreciation of the Canadian dollar removed $46.3 billion from the value of Canada's international assets.

Chart 1
Canada's international investment position

The nation's net external liability (the difference between its external assets and foreign liabilities) amounted to $170.4 billion at the end of the third quarter. This was 11.2% higher than the level of $153.2 billion at the end of the previous quarter, which was the lowest in more than two decades.

The value of international assets fell to $1,001.1 billion, a $5.6 billion decline from the end of the second quarter. The dollar, which gained 5.4% against its US counterpart during the quarter, removed $46.3 billion from the value of these assets, which offset all net transactions.

At the same time, Canada's international liabilities increased by $11.6 billion to $1,171.4 billion. The strengthening dollar removed $22.3 billion from the position, but the net transactions of $38.2 billion more than offset this effect.

As a result, net external liabilities represented 12.3% of Canada's gross domestic product at the end of the third quarter, up from 11.4% in the previous quarter.

The Canadian dollar gained ground against most other major currencies during the third quarter, including 6.2% against the euro and 7.9% against the Japanese yen.

Assets: Canadian direct investment abroad declines, while foreign bond holdings rise

The stronger Canadian dollar had its largest impact on the value of Canadian direct investment abroad, which fell by $10.2 billion to $452.1 billion. The exchange rate revaluation removed $23.3 billion from asset values. This more than offset net transactions of $11.8 billion during the third quarter. Direct investment assets in the United States were responsible for about one-half of the decline.

Canadian holdings of foreign bonds increased significantly for the fourth straight quarter, rising nearly 10% to $74.5 billion at the end of September. These holdings were up by about 30% since the beginning of the year, mostly due to purchases. This represented the ninth consecutive quarterly increase.

Canadian holdings of foreign stocks declined in value by $6.6 billion to $179.1 billion, the lowest level since the end of 2000. The strongest quarterly flow of new investment in nearly four years, combined with the good performance of the foreign equity markets, were not enough to offset the negative impact of the exchange rate.

Canada's international reserves closed the quarter at $38.5 billion, the lowest level since the third quarter of 1999. At the same time, the deposit assets of Canadian residents increased by almost $9 billion to a record $135.0 billion.

Liabilities: Jump in foreign direct investment in Canada

Foreign direct investment in Canada jumped $15.1 billion to $390.0 billion at the end of September, the biggest quarterly increase in five years. Foreign direct investors increased their investment position in Canada, mainly through acquisitions and reinvested earnings in existing subsidiaries.

Foreign direct investment from the United States reached $253.6 billion, up $11.1 billion from the previous quarter.

Foreign investors sold debt securities during the quarter. Combined with the strengthening Canadian dollar, this resulted in the strongest quarterly decline since the second quarter of 2003 in foreign holdings of Canadian bonds and money market paper.

Foreign holdings of Canadian bonds were down $15.4 billion in value to $388.9 billion. This level fell below the $400 billion mark for the first time since 2001. At the same time, foreign holdings of Canadian money market paper fell by $2.0 billion to $17.7 billion, its lowest level in 18 years.

Foreign holdings of Canadian stocks increased $2.7 billion to a record $112.0 billion after a decline in the second quarter. The S&P/TSX composite index, which represents the performance of the Canadian stock market, gained over 11% during that time, its highest quarterly increase in four years.

Finally, Canadian deposit liabilities to non-residents increased $17.7 billion to $198.9 billion, while loan liabilities to non-residents fell by $6.7 billion to $41.3 billion.

Chart 2
Canada's net international liability to GDP