Canada’s current account surplus with the rest of the world, on a seasonally adjusted basis, decreased $4 billion in the second quarter to $4.2 billion. This was the second consecutive important decrease in the surplus after it had reached a peak at the end of 2005. As in the previous quarter, most of the decline came from a lower surplus on trade in goods.

In the capital and financial account (not seasonally adjusted), Canada’s international assets and liabilities grew strongly in roughly equal measures for a second consecutive quarter. The increase to Canada’s foreign assets came, in part, from near record acquisitions by portfolio investors.

Canadians purchased $18.8 billion of foreign securities in the second quarter, consisting of bonds and equities. Together with the record first quarter buying, Canadians have invested $38.7 billion in foreign securities during the first six months of the year.

Two-thirds of the $18.8 billion investment was in foreign bonds, a record high for a second straight quarter. Similar to the first quarter, some of the Canadian investment was channelled into “maple bonds.” Foreign issuers have been marketing their debt in Canada for some time now. Typically, the bonds are denominated in Canadian dollars and sold to institutional investors.

The second quarter saw Canadian investors again buy large amounts of foreign equities, totalling $7.6 billion. At the same time, Canadian investors sold back the $1.1 billion worth of foreign money market paper they acquired in the first quarter.

An $11 billion injection into foreign economies by Canadian direct investors was a return to a more usual level of investment comparable to those observed over the last few years. The first quarter investment of $7.3 billion was the lowest quarterly amount in two years. Most of the investments in the current quarter were injections of working capital into existing foreign affiliates. From an industry perspective, investment was concentrated in the finance and insurance sector. Direct investment abroad was well spread geographically, led by investment in Europe.

In the second quarter, foreign direct investors injected $8.4 billion into the Canadian economy, down from the average of $14.4 billion of the past three quarters. The foreign investment was split between acquisitions, advances of working capital and strong reinvested earnings. Although there were a number of announcements of major foreign acquisitions during the second quarter, many of these have not formally closed. Much of the second quarter investment came from American investors and was widely spread by industry.

Foreign portfolio investment strengthened in the current quarter as investors bought equities and money market paper. They bought $10.4 billion worth of Canadian securities in the quarter, which exceeded investment for all of 2005.

Foreign investors bought $9.1 billion worth of equities during the quarter — despite a falling S&P/TSX composite index. The investment came largely from the U.S., while investment from British investors was offset by sales of other European investors.

Non-residents continued to sell Canadian bonds for a fourth straight quarter. The foreign divestment of $3.2 billion in the second quarter was the largest of the four quarters, which have totalled $8.9 billion. In the second quarter, they sold federal government and corporate bonds but bought some bonds issued by federal enterprises.

Regionally, the divestment came mainly from the U.S. and emerging economies, countered by some buying from European investors. On a currency basis, the foreign selling was largely in Canadian bonds denominated in US$. However, there were purchases of bonds denominated in other foreign currencies.

The other investment account recorded a large net inflow of $13.8 billion. The inflow was mostly related to higher deposit liabilities and secondly loan liabilities. Deposits and loans also increased strongly on the asset side, partly offsetting the increased liabilities.