In addition to the fact that Canadian stocks generally offer much higher yields than their US counterparts, US investors have also found the Canadian market attractive because of the country’s economic resilience amid the Global Financial Crisis.

Recognition of that relative strength, along with Canada’s resource riches and conservative financial system, helped boost the Canadian dollar above parity with the US dollar for much of  2011 and 2012.

And while the loonie finally sold off last year, that hasn’t stopped the world’s central banks from continuing to add Canadian dollar-denominated debt to their reserves.

A reserve currency is a currency that is held in significant quantities, usually in the form of highly rated government bonds or bills, by governments and institutions as part of their foreign exchange reserves, which they use to help facilitate international trade.

In this context, a currency can also be accumulated as a precaution for contingencies that require intervention in an exchange rate or restoring liquidity when there’s an extraordinary disruption to the flow of global capital markets. Demand for a particular currency can also help reduce borrowing costs, particularly for governments.

Although the loonie declined 7.4 percent last year, the amount of Canadian dollar-denominated debt reported held among global central banks’ allocated reserves jumped 25 percent year over year, to USD108.5 billion at year-end from USD86.8 billion in the fourth quarter of 2012.

According to the International Monetary Fund (IMF), the Canadian dollar now accounts for 1.7 percent of allocated reserves, up three-tenths of a percentage point from a year ago, ranking it fifth among the world’s currencies.

By this measure, the US dollar still dwarfs other developed-world currencies, accounting for 61.2 percent of central banks’ allocated reserves. The euro comes in a distant second at 24.4 percent, the British pound is at 4 percent, and the Japanese yen is at 3.9 percent.

However, concern about American profligacy is causing foreign central banks to slowly diversify away from the US dollar. The IMF reports that the US dollar’s share of the currency composition of official foreign exchange reserves (COFER) has slid nearly 10 percentage points since 1999.

And that trend partially explains the Canadian dollar’s recent ascendance to the top ranks of global reserve currencies, an exclusive club that traditionally has been dominated by the US dollar, the euro, the Japanese yen, the British pound and the Swiss franc.

As subscribers to our sister publication Australian Edge already know, the Australian dollar has enjoyed a similar rise to prominence over the past half decade, and now ranks just behind the Canadian dollar among reserve currencies, though both are essentially neck and neck in terms of the value of reported holdings.

Based on conversations with reserves managers around the world, the Bank of Canada (BoC) attributes the newfound reserve status of the loonie and the aussie to not just central banks’ desire to diversify away from the greenback, but also the perceived safety of the two countries and the opportunity to earn higher yields than found in traditional reserve currencies.

And this demand might be even greater than the COFER data suggest. Since not all of the foreign reserves managers responded to the IMF’s request for data, the BoC estimates that the actual amount of Canadian dollar-denominated debt among the world’s reserve holdings is nearly double the official figure, at roughly USD208 billion.

The BoC arrived at this figure by extrapolating the percentage held among allocated reserves, which are roughly 53.3 percent of the USD11.7 trillion in total global reserves, to unallocated reserves, which comprise the balance of global reserves.

The term “unallocated reserves” simply refers to those countries that reported their total foreign exchange reserves, but failed to disclose the actual composition of those reserves. The central bank also notes that before arriving at this estimate, it used a variety of approaches that resulted in a range from USD172 billion to USD219 billion.

Furthermore, central banks’ demand for the Canadian dollar is likely to be relatively stable over time. In contrast to currency traders who flit in and out of positions, the BoC observes that foreign reserves managers are characterized as patient, buy-and-hold investors whose primary objectives are preserving capital and maintaining liquidity, while maximizing returns within those constraints.

Interestingly, while countries that have substantial two-way trade tend to hold higher proportions of their respective currencies, the emerging markets, with which Canada has yet to establish strong trade ties, accounted for about two-thirds of foreign holdings of Canadian dollar-denominated debt. And demand from these fast-growing economies means the loonie’s share of foreign holdings will likely continue rising.

The BoC believes developing countries are starting to favor the loonie because the higher yields of Canadian securities offset some of the higher expenses their central banks incur when holding these assets.

Or perhaps they also recognize that in turbulent times Canada will likely remain a relative safe haven compared to its developed-world peers. After all, a country’s foreign reserves don’t exist solely to serve international trade, they’re also an insurance policy.

Portfolio Update

Leading general contractor Bird Construction Inc (TSX: BDT, OTC: BIRDF) reported first-quarter net income of CAD0.9 million on construction revenue of CAD274.7 million, compared with CAD2.4 million and CAD288.5 million, respectively, in the first quarter of 2013.

During the quarter, the company secured CAD417.7 million of new construction contracts and now has a record backlog of CAD1.4 billion, up 11 percent from year-end and a whopping 37 percent from a year ago. Of this backlog, projects worth about CAD806 million are slated to commence this year, with the balance of CAD606 million carried into subsequent years.

Management acknowledged its disappointment with its first-quarter performance, attributing the results to costs resulting from the timing of large projects, postponements of projects from clients operating in the mining sector, and the inherent seasonality of some of the company’s operations.

However, management does not expect these trends to persists and foresees an increase in construction activity starting in the summer, which should boost its results during the second half of the year.

Indeed, analysts expect the company to continue shifting toward higher-margin industrial work, with the energy sector, particularly companies operating in Alberta’s oil sands, providing a number of opportunities to win contracts for medium- and large-scale projects.

Bird operates from 11 offices across Canada, with work split almost evenly between the heavy industrial market as well as the industrial, commercial and institutional (ICI) markets. Even so, the industrial market’s contribution to Bird’s revenue has grown from 31 percent in 2011 to 37 percent in 2013.

Bird’s first-quarter numbers missed analyst estimates for earnings per share (EPS) by 81.5 percent, the fifth consecutive quarter in which the company has disappointed on profits. And Bird also fell short on revenue projections by 11.4 percent, the first time in four quarters it’s failed to exceed expectations for its top line.

Nevertheless, the company’s mix of analyst sentiment actually improved and is now slightly more bullish than it was previously, at five “buys,” one “hold,” and one “sell.”

TD Securities upgraded the stock to “buy” from “hold,” while also increasing its 12-month target price to CAD15.50 from CAD14.50.

The consensus 12-month target price now stands at CAD15.46, suggesting potential appreciation of 9.6 percent above the current share price.

As the company moves beyond the execution problems that plagued a major project last year, analysts expect full-year 2014 adjusted earnings per share to jump 134 percent year over year, to CAD0.80, on a 3 percent increase in revenue, to CAD1.37 billion. Adjusted earnings per share are forecast to rise another 45 percent in 2015, to CAD1.16, with revenue growth of 7 percent, to CAD1.47 billion.

Over the trailing 12-month period, Bird’s shares have risen 12.1 percent on a price basis in local currency terms. The stock has fully recovered from its post-earnings release selloff earlier this week and now trades just 7.1 percent below its all-time high set back in May 2012.

Bird pays a monthly dividend of CAD0.0633 (CAD0.76 annualized), for a current yield of 5.4 percent.

Bird Construction is a buy below USD14.50 in the Aggressive Portfolio.