CDN$ is public enemy #1

[Cardboard]

Over the last couple of years, I have been watching the climb in the CDN$ from $0.60 and I have tried to identify beneficiaries. I have found very very few.

 

It was supposed to help importers and consumers, but what we are seeing instead is a middle man trying to scoop a bigger margin. This has encouraged cross border shopping in a country that has something like 90% of its population within 100 km of the other.

 

Then if you look at manufacturers who are importing goods/machineries for their plants, they see a cost saving there only to get hit more when they sell their finished product since they sell in North America and not just in Canada.

 

If you are a Canadian investor, there is really no benefit at all to a strengthening CDN$. If you invest in USD$ you are screwed and if you invest in Canadian based companies, it is very likely that their operating results will be negatively impacted by this phenomenon. There are very few places where you can hide.

 

The only real beneficiaries that I have found are "the snowbirds". They see an increased purchasing power when they go down to Florida, Texas and Arizona. This could benefit the Canadian economy if they were using these extra dollars by spending more in this country, but what is happening instead is that they increase their trip duration and go to nicer U.S. golf courses.

 

On a net basis, I firmly believe that a strengthening CDN$ against the USD$ is a strong negative for the Canadian economy. We are way too tied to the U.S. economy and our way of living is too similar for us to afford such divergence in our medium of exchange. Another way to think about it, is to imagine that Texas would have its own currency because it is a large exporter of oil & gas, high tech and agriculture to the U.S. Would that be a benefit to them?

 

Some say that massive inflation is coming in the U.S. due to the various things that have been done to resolve this crisis. Do you really believe that Canada will avoid all or most of it? If that is the case, then I would think that Canada would have come out much better off than the U.S. at the end of the 70's. I see absolutely no indication that this has been the case.

 

Therefore, I believe that the solution is some kind of pegged currency at a level which will ensure that our purchasing power is close to parity. Stability is key to economic growth and I see no reason why tying up the CDN$ to the USD would be any different.

 

Cardboard

[Guest Broxburnboy]

"On a net basis, I firmly believe that a strengthening CDN$ against the USD$ is a strong negative for the Canadian economy"

 

The reality is that a strengthening CDN is a vote on the credit worthiness of Canadian sovereign debt vs. its US counterpart.

For years the official policy of the Bank of Canada has been to suppress the exchange rate in order to preserve the manufacturing export sector predominantly in Eastern Canada, in much the same way that China has deliberately kept its currency subservient to the USD in order to keep the balance of trade in its favour and capture the lion's share of global manufacturing. 

The trade off has always been accepting higher prices for US imports, but benefitting by full employment in an export oriented economy. This trade off only works as long as the US is buying more than it sells. When the tide turns and the

positions reverse, there are pressures on the CDN to rise. When there is real doubt of the future purchasing power of the USD, Canadians and others are more likely to bid up the relative price of the loonie, interest rates be damned.

The current and projected run up of the loonie will hurt the aforementioned industries... but a lot of them have already succumbed to the previous run up a couple of years back.

The success of the oil sands projects have turned the loonie into a petrocurrency... backed by the current price of oil and other commodities and the decoupling from the USD is almost complete.  The current interest rate policy of the BofC has been completely reversed and BofC interest rates will shortly be lower than those of its US counterparts as US rates must rise. This should have the effect of slowing the appreciation of the loonie, giving more time for Canadians to adjust.

 

I guess my point is that it is not the CDN dollar that is the enemy, but the erosion of the US buck which will impact the Canadian economy.

[Viking]

Cardboard, the Canadain dollar has been on my mind lately as well. I wonder how Canadian manufacturing (particularly in Ont/Que) will be able to cope.

 

As an investor, I do not like what it does to my current US holdings (i.e. ORH). However, other companies that I would like to hold, like BRK, are now much cheaper and I like that. Net/net, given that I can increase me US holdings I will be able to use the stength of the CAN $ to my advantage (note, the CAN$ would need to move to the $0.95 range before I seriously start thinking about buying US stuff to take advantage).

 

Regarding the near term outlook, David Rosenberg is of the opinion that we are seeing a bear market rally and when fear returns to the market (and stocks and commodities sell off) the Can$ will also sell off again. This makes sense to me as likely.

 

Regarding the medium term outlook, I do think China and their demand for commodities going forward will provide a somewhat new dynamic for Canada's resource producers (less linkage to US). I think our healthier balance sheet will also result in 'less bad' stuff happening up here. Having a strong Can$ over time helps not only maintain our purchasing power but actually increases it (good for most investors, unless one is maxed out with US holdings today).

 

Cardboard, I also think about the Remnimbi. I think this is the currency to hold long term. Do you (or others) have any thoughts about the Chinese currency? Any thoughts on how to get exposure?

[Aberhound]

I have been looking at this asian government bond fund for Renminbi exposure. I believe most of the asian currencies it holds will move with the Renminbi.

 

www.abf-paif.com

[scorpioncapital]

I love it, I've positioned myself to take advantage of the strengthening CDN$ and my US$ debts are melting away every single day!

 

 

[Uccmal]

yep, back and forth, forth and back.... I bought US dollars at 1 cdn, Canadian dollars at 0.82-0.77, and am now reversing the position.  Has to be my most lucrative trade in the last year. 

[Packer16]

There are 2 ETFs/ETNs tie the Chinese Yuan - CNY and CYB

 

Packer

[Smazz]

Black gold. 

Me thinks they should tax the hell out of the Oilsands (more than currently) and send all proceeds to the east! ;D

[Cardboard]

"The reality is that a strengthening CDN is a vote on the credit worthiness of Canadian sovereign debt vs. its US counterpart."

 

If that was the case, I would be happy since I think that the CDN$ would trade very tightly to the USD. It could trade up a bit, but nothing like what we have seen. Our standard of living would be also improving relative to the Americans.

 

However, what is really going on, is that a few large speculators are moving the CDN$ up whenever oil is going up and down whenever it is going down. I would appreciate if someone could demonstrate the direct correlation between a higher price for oil and an increased ability for this country to repay its sovereign debt. Is it worth a penny for every move of $1 in oil? Give me a break!

 

This reminds me of the correlation that almost put in ruins Switzerland because the Franc moved in tandem with gold in the late 70's. If oil goes to $200 or more, which is possible if we really hit some kind of peak oil, a CDN$ that doubles over the USD could kill our economy.... and forget about some kind of advantage buying BRK or whatever at $0.95!!!

 

What about long term holders of FFH here? Would you like FFH to be worth $400 U.S. because they are doing well and seeing a share price in Toronto of $200 CDN? Ever thought about the impact of such USD/CDN$ move on your margin requirements? What about those who are working for large U.S. multinationals? How many shares of IBM or GE do you hold and what would be the impact on your retirement if their value got slashed in half?

 

Cardboard

[SharperDingaan]

 

Keep in mind that the $CAD is a petro currency, & that Canada increasingly makes more from its net energy - vs manufacturing exports. Higher energy prices will tend to strengthen the $CAD, ... & if the $USD, or GBP simultaneously weaken, the CAD FX rate will rapidly rise. The BOC can/will moderate the volatility, but they cannot prevent it.   

 

CAD is going to appreciate, but the real question is where is the new 'real' ? If S&Ps UK downgrade were to extend to the US we could very quickly get back to 1.10 - but if at the time it occurred oil/gas were also strong, maybe the CAD FX rate spikes at 1.20? Premature hedging in anticipation of BOC action - could be a very expensive opportunity cost!

 

By downgrading, S&P has effectively said that the UK government cannot pay its bills without printing money (quantative easing) - & the resultant inflation will devalue the currency.

 

To mitigate FX volatility the BOC would essentially have to inflate the CAD money supply at the same rate (or faster) as its major trading partners. To diffuse the inflation Canada would then need to either do foreign acquisitions, or experiences a domestic property boom.

 

The decisions are just as tricky north of the border.

 

SD

 

 

 

 

 

 

 

[Viking]

I wonder how the oil sands will fare 5 or 10 years out given the building outcry regarding the environmental concerns (and Obama's negative view). Perhaps our petro currency is not so pumped up...???

 

Cardboard, I have a hard time understanding how the CAN$ will move much north of parity to the US dollar (for any length of time). Right now there is a perception the Canadian economy is doing OK (versus the US). Wait until unemployment here gets going as manufacturing continues to get hollowed out. And all the spending cutbacks in the resource industry really begin to hit.

 

My chief concern is what happens if there is a stampede out of the US$ (an accelerated version of what we have seen the past month or so). Perhaps this is what you are getting at... something that happens quickly and destabilizes fiat currencies...

[Uccmal]

There are too many factors to make even a reasonable guesstimate of what would happen in Canada.  Rising oil rices for a sustained period will eventually bring in to production more natural gas, offsetting the oil effect.  The US has lots of gas, as does Canada.

 

If oil prices rise too high then a recession ensues.  This has the effect of pushing down the Canadian dollar or raising the US dollar, however you look at it.

 

During times of low Cdn dollar vs US I move all my cash into my CDN account (effectively buying Cdn $).  This creates a large margin debt in my US account and a large cash position in my Cdn account.  A couple of weeks ago I started moving some of the money the other way.  Should we reach parity again I will completely reverse the position and hold my debt in the Cnd account and my cash in the US account.  At some point it will reverse again and I will adjust it backward.

 

I have been into hundreds of manufacturing plants in Ontario.  Without fail they buy their equipment from the US (mostly) or Germany.  Many (not all) of these companies are suffering badly now.  Those that will survive have preserved their cash and are taking the time to upgrade their worker training, their equipment, and their productivity.  I have seen it first hand.  The higher Cdn dollar helps them to do this.  The losers are the same as those everywhere.  They will die out. 

 

You are going to have a hard time convincing me that RIM, Magna, Linamar, Bombardier, are not going to do well going forward.  Magna employs directly, and through its supply chain probably 75000 people in Ontario.  Not to say I a would buy the stock of BBD but the company will be fine.  They are still selling Q400s like hotcakes. 

[Guest Broxburnboy]

The impact of a weakening US economy will have an effect on the Canadian economy, after all when your best customer's purchasing power is curtailed, you will sell less exports. However, as the USD retreats, Canada will buy more from the US (In my own circle of acquaintance, it is quite popular to buy second homes in Arizona) and help stimulate the economy there. This is the way bilateral trade is supposed to work.

 

Canadians and their dollar have the purchasing advantage right now (in much the same way the Chinese do) because they have an accumulated stash of personal savings (relative to the US), and their governments (federal, provincial and municipal) are in a relatively stable fiscal position. We have social savings in the form of a funded pension plan and a funded medicare system with real assets (hospitals, infrastructure) which are a form of prepaid expenses and a guaranteed minimum income.

It would take a prolonged depression to erode the value of these.

 

The things I find disturbing about the shape of the US economy, is that the causes of the cash drain have not been addressed. The Iraq (and other foreign wars) have been a huge drain over a number of years. Money thrown in this direction is like taking a percentage of GDP overseas and using it to reduce the GDP of other countries. It creates a circle of wealth destruction, where all parties lose (including, eventually, the military contractors for whose benefit the whole mess has been created). If that money had been spent in the US on any form of social capital (education, health, infrastructure), it would have acted to forestall and minimize the impact of the imploding credit bubble.

Interest rates in the US have been kept too low for too long (a la Japan in the 1990s) in order to buy time for the housing bubble and credit bubble to stabilize, although the magnitude of the easy credit induced overbuilding has produced a huge unsold inventory that will take years to reduce. It may come to the point that buildings need to be bulldozed in support of prices in the same manner that excess wheat was once burned to reduce supply.

It has been my own observation during many trips to different parts of the US over the last decade, that the standard of living gap between Canada and the US is exagerated. The perception is that Canadians and their dollar are the poor cousin.. that perception will continue to change.

[Packer16]

I disagree with your premise about spending dollars on military protection against terrorist threats.  It is similar to insurance on high impact low probability events.  The US bears most of this burden (pays most of the premiums) to keep the threats in check.  Overtime, the US effort has become more focused on the true threat of Al Quada versus the missteps of Iraq. 

 

As for education, the US has spent lots on education (increased $ per student) but the student achievement has gone nowhere.  Is it the same in Canada?  As for health care, the US has a good system that has paid for the R&D of many treatments that many more national health care systems now can get for cheaper.  It may be time for the US to provide a similar "basic" benefit to all but in so doing it will tax away part of its future economic growth.  As for infrastructure, maintenance is required but spending just to spend leads to silly projects like fast rail to places where people will never take the train like Western NY. 

 

My point is that all four activities need spending (defense, education, health care and infrastructure) but if money is spent in non-productive ways, then we all lose.  In my opinion, the defense dollars have been scrutinized pretty well but the education and infrastructure have not because they can be sold by politicians with little cost/benefit analyses.

 

Packer   

[SharperDingaan]

 

If you take it that a USD & GBP devaluation is almost unavoidable, the only question becomes what the other countries do about it. The historical approach has been increasing central bank intervention culminating in formal 'resets' every 15-20 years, along the lines of Bretton Woods & the Plaza Accord.

 

So long as the devaluation is discreet it can be managed. But all it needs is for someone to 'feel lucky' & try making a name for themselves by calling the US feds bluff - and win. Soros did it with the Bank of England & is forever remembered for it, so it CAN be done.

 

How middle america reacts to the devaluation, will be key.

 

SD

 

 

 

[ubuy2wron]

I think the old chesnut is "do not fight the fed" I suspect that if a group of hedgies tried to gang up on the fed and start a run I would bet the hedgies run out of ammunition first. Now if it is the fed vs the rest of the world the story would change. The dollar will collapse IMO the same way all currencies collapse printing too much money. If the printing presses are still running full bore in 12 months then maybe, the fed can reverse policy on a dime if they wish to. I would not want to be short the buck the day the policy revision was announced. Currently I am long US I actually think the CDN dollar will be back to par before another 12 months pass .

[Smazz]

 

During times of low Cdn dollar vs US I move all my cash into my CDN account (effectively buying Cdn $).  This creates a large margin debt in my US account and a large cash position in my Cdn account.  A couple of weeks ago I started moving some of the money the other way.  Should we reach parity again I will completely reverse the position and hold my debt in the Cnd account and my cash in the US account.  At some point it will reverse again and I will adjust it backward.

sorry Al, I think you lost me. Are you talking about transfering the Currency or just holding US$ in your CAD account and vise versa? Youd still be getting dinged on the currency swap yes?

[Uccmal]

smazz, yes, I am transferring the cash between accounts so I am getting dinged on the transaction. 

 

However, moved cash to the US account in a big way around parity; then moved it back to the Cdn account last fall early winter - this left me with margin debt in my US account and a huge cash asset in my C - account;  Now I am starting to equalize them by moving cash back to my US account. 

 

I figure I have made at least 20% on the money I have round tripped after fees.  It was not really even intentional at first. 

[Smazz]

ok yes,

at first I thought you were just flip flopping back and forth like crazy- thats why I asked because those one or two pts add up.

 

Yes, I did a similar thing - my biggy was when the CAD$ was (from my evaluation) way over value and ORH was the opposite so I had to be 50% wrong to break even.

Worked out great for me too - Im now looking at this area closely again.

 

Thanks Al.

[alertmeipp]

I like IB in this aspect. You can just trade Forex on the same account and they just charge 2.5 bucks for $25000+ transmission. (some broker charge 1% for the transmission - which is crazy.)

 

[Smazz]

2.5 bucks for $25000+ transmission. (some broker charge 1% for the transmission - which is crazy.)

 

what would be the transmission there Alert?

[alertmeipp]

sorry, I meant commission.

Some brokers/banks don't call it comission, but there is a large gap between the buy and sell price.

In IB, you can exchange funds at a much more favorable rate.

[Guest JackRiver]

Currently I am long US I actually think the CDN dollar will be back to par before another 12 months pass .

 

Ubuy2wron

 

Can you further explain what you mean by being long the US and expecting the CDN back at par?

 

Yours

 

Jack River

[ubuy2wron]

Jack< I am doing like many others here moving dough back and forth between US and CDN accounts to hedge my US exposure. I recently covered off my US debit and converted so I am long US. I am thinking that we are getting close to some kind of meaningfull pull back short term in the mkts commodities and US dollar VS CDN. These mkts have all been trading together stocks and commodities trade one way the currency ie the US dollar trade the other. Mkts go up US $ goes down. If my trading strategy is correct I will reverse this trade on a mkt pull back and go short the US dollar again. I think the CDN $ will get back to parity once we are in some kind of positive economic cycle again. The relative fiscal strength of the CDN economy is just so much better than our southern neighbours it will result in a currency that will naturally float in a positive direction to the Yankee dollar on a long term basis. I was lucky enough to buy a significant amt of US$ when the it was trading at a 10% premium to the US dollar in November of 2007. My plan at that time was to purchase a US vacation property. This single move has probably been the most profitable in an absolute sense I have made in the last two years. There is an old jewish saying its better to be lucky than to be smart, I know I was lucky. Many of my attempts at being smart in the last 2 years have not worked out so well.

[Smazz]

there is also a good saying along those lines: "the more I practice and learn, the luckier I get"

give yourself some credit - I know I do! ;D