Senate Committee on Foreign Affairs Ottawa, Canada George Vasic Equity Strategist and Chief Economist UBS Securities Canada Inc. 22 October 2003

1 The Obvious: Rises / falls in the Canadian dollar are bad / good for trade and the economy, all else equal… But…  Depends on why the currency is moving  Depends on the monetary policy reaction  Depends on expectations of future movement

2 Current context… …Appreciation has occurred from a position of undervaluation Source: Bloomberg, Statistics Canada, Bank of Canada, UBS

3 Current context… …Canadian economy is structurally stronger and better balanced than the U.S. Source: Statistics Canada, Bureau of Economic Analysis, UBS Canada U.S. Net Foreign Liabilities as a % of GDP

4 Current context… …Rapid rise will spur adjustment Source: OECD Currency-adjusted relative unit labour costs in manufacturing sector

5 Current context… Fed study of 25 episodes of current account adjustment from 1980 to 1997 among industrialized countries showed: “sustained surge in export growth is the more important force [than declining imports]”  Canadian companies stand to benefit from higher U.S. exports. Source: Caroline Freund, Current Account Adjustment in Industrialized Countries, International Finance Discussion Paper, No. 692, Federal Reserve, December 2000 …USD is depreciating

6 Current context… …Strong North American integration overstates likely impact in model simulations Source: Statistics Canada Canadian import content of exports by sector

7 Current context… Longer term, more appropriately valued currency could reduce our goods / services trade imbalance. Source: Statistics Canada Current account balance as a % of nominal GDP

8 Conclusions  Relative demand more important to trade implications than exchange rate  Rise to 70 cents was welcome  Productivity reaction key to longer term virtuous circle

9 Contact information UBS Securities Canada Inc. 161 Bay Street, Suite 4100 Toronto, Ontario M5J 2S1 Tel: Fax: UBS Securities Canada Inc. is a subsidiary of UBS AG.