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

TORONTO Mon Dec 10, 2012 10:03am GMT

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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) $15.1 billion bid for Nexen Inc NXY.TO and the $5.3 billion takeover of Progress Energy Resources Corp PRQ.TO 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.

On the equity side, other strategists said shares of likely acquisition targets may gain, or at least not lose the implicit takeover premiums that have already been built into their stock prices.

"The market will be positive, though by and large investors will contain their enthusiasm," said Bob Gorman, chief portfolio strategist at TD Waterhouse. "It's pretty clear that the government isn't looking to set a precedent with this, but rather looks at this more as the exception than the rule."

Stocks in Canada's energy sector are down almost 9 percent so far this year, pressured by low natural gas prices and by the deep discounts of Canadian oil versus international benchmarks. Miners have fared even worse.

The changes in Canadian foreign investment rules initially target investments in the oilsands of northern Alberta, the third largest reserves of crude oil in the world after Saudi Arabia and Venezuela.

That means big domestic oilsands players like Suncor Energy Inc (SU.TO), Husky Energy Inc (HSE.TO) and Canadian Natural Resources Ltd (CNQ.TO) are essentially off-limits to state-owned entities. But ones with global operations, such as Talisman Energy Inc (TLM.TO), could remain in play, giving investors a clearer idea on how to proceed.

In addition, the handicapping of deep-pocketed state firms may encourage private sector buyers who otherwise would not have not made a move on a Canadian company for fear of being outbid.

"The tougher tone certainly suggests there isn't going to be a free-for-all, ... but as with anything in the capital markets, whenever the rules are more clearly defined there is far more efficiency in the market," said Craig Fehr, Canadian market strategist at Edward Jones in St. Louis, Missouri.

(Additional reporting by Solarina Ho and Scott Haggett; Editing by Leslie Adler)

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