Analysis: Canada's clarity on foreign investment rules to buoy C$

Sun Dec 9, 2012 2:54pm EST
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By Alastair Sharp

TORONTO (Reuters) - The greater clarity on foreign investment rules that Canada provided along with its approval late last week of two big takeovers should boost the Canadian dollar when markets open on Monday and could also buoy stocks of companies seen as likely takeover targets.

Although the new rules announced with the approvals of CNOOC Ltd's (0883.HK: Quote) $15.1 billion bid for Nexen Inc NXY.TO and the $5.3 billion takeover of Progress Energy Resources Corp (PRQ.TO: Quote) by Petronas PETR.UL will curb investments by state-owned enterprises, they will not shut off the foreign investment tap, analysts and market sources said.

"It highlights an important medium-term structural theme," said David Tulk, chief Canada macro strategist at TD Securities. "It does show a willingness from Canada's government to encourage foreign investment, which speaks to a longer-term interest into the Canadian dollar."

The Canadian dollar has traded in a tight range against the U.S. dollar for most of the last two months, trading only briefly at a level inferior to the U.S. dollar and mostly trading above 98 Canadian cents to the greenback.

The currency rose on Friday after Canada approved the two bids, supported by the multi-billion dollars in currency purchases that will be needed to complete the transactions.

"On Monday we should see some continued positive movement," said Don Mikolich, executive director of foreign exchange sales at CIBC World Markets. He said the Canadian dollar could test C$0.98 to the U.S. dollar, but it was "hard to see how Canada would improve too dramatically sub-98."

Canada's new rules aim to prevent future large-scale investments in the strategically significant oilsands by state-owned firms like CNOOC or Petronas. Prime Minister Stephen Harper insisted, however, that Canada remains open for business.

"A 'no' would have had a larger negative impact than this being currency positive here," Mikolich said, adding that macro-economic factors such as the U.S. "fiscal cliff" remained the focus for many in the currency markets.   Continued...