Canada’s Cross-Border Carry Trade

Canada has been spending more than its national income for much of the period since the Global Financial Crisis, relying for this on net financing from rest of the world. Yet Canada’s foreign asset position has grown substantially than its foreign liabilities despite these deficits. This improvement reflects favorable changes in asset prices and exchange rates. From 1990Q1 to 2026Q2, estimated cumulative valuation gains were about 3 times as large as the cumulative current-account deficit. These gains also reflect a favorable portfolio composition. Canada increasingly holds foreign equity and direct investment, much of it denominated in U.S. dollars, while issuing relatively safer Canadian-dollar debt. Hence, higher returns on foreign equities, together with an appreciation of the U.S. dollar, raised the value of Canada’s net foreign assets. Larger gross positions over time amplified these valuation effects. Overall, valuation gains have relaxed the current-account adjustment needed to stabilize Canada’s external position, permitting a higher level of national expenditure than would otherwise have been feasible.