It seems that foreign investors are growing weary of the European financial crisis, and taking responsibility into their own hands.  That’s why, according to a recent report, global financial investors snapped up a record amount of Canadian investment assets in the third quarter – approximately $16.2 billion.  And given what’s out there and the runup in the money markets, the trend could continue.  This could have positive and lasting effects for the USDCAD currency pair.

According to the most recent Statistics Canada report on Canadian foreign securities purchases, global money managers snapped up a net $7.2 billion in Canadian securities in September.  For the most part, the majority of the interest was targeted toward money market or short term paper, helping the net figure to gain for the third straight month.  Investment in short term federal investments rose to $5.3 billion or almost 50% from this summer’s levels.

A more solid economy has lured global investors away from more recognized debt in both the United States and Europe.  European financial indecision and crisis has been a big detriment on EU based debt, even as yield cross higher above euro-era records.  Across the Atlantic, the US is dealing with its own recessionary potential and lack of political conviction that is helping to crimp domestic growth.

But, Canada is seemingly on more solid economic ground.

Even though Bank of Canada bankers have downgraded previous growth forecasts for 2012, the rate of expansion is still positive for the Canadian economy this year.  For 2011, the country is expected to expand by about 2.2%, with inflation that is well contained within the central bank’s mandated target of 2-3%.  Manufacturing has also powered the economy through these tough times – with the economy averaging a 7.6% pace of expansion for the year.  Compare this to the US or Europe.  Both economies are expected to grow at a less than best 1.2 and 1.5% annualized rate.  Manufacturing and confidence reports also haven’t been good for both US and EU regions where consumers are being plagued by record unemployment.  Not a good economic environment.

The positive outlook has boosted Canadian money market yields making them more attractive than comparable investments in both the Europe and US.  Against European assets, Canadian t-bills and short term paper are seemingly less risky – especially with the potential for default being much higher in the EU since the beginning of last year.  Credit default swaps have supported the idea, with rates tied to European countries soaring to records.

Compared to US yields, short term rates in Canada are higher and therefore far more attractive.  Three month t-bills that are currently yielding barely above 0% in the US are at 0.88% in the Canadian market.  The disparity grows wider when moving out on the curve to longer term Canadian 2-year notes – which are yielding a little more than 3 times their US counterparts at 0.93%.  US 2-year notes are currently at 0.27%.

The higher rates, and wider US-Canadian debt spreads, will continue to attract global investors that are looking for a lower risk profiled investment with an adequate rate of return – which Canadian debt offers.  This will translate into a higher demand for Canadian dollars, especially against the US dollar – potentially propelling the exchange rate back to parity.