CDN$ is public enemy #1

[Smazz]

 

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!

 

There has to be a magic bullet price/$ratio once stripped out the speculation because as you have mentioned, pull on one lever, another goes up and vice versa. In CAD$, Oil/Gas goes up, Mfg goes down. The question is, what is that ratio? We just cannot get into lukewarm water here for whatever reason in the markets. It seems as soon as you get some consistency, you get a flood of speculation.

From my experience, it has been easiest to stay on the sidelines until we have a mania situation (which seems is all we have anymore) and get the hell on the other side of the position and wait again.

[oec2000]

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, be careful what you wish for. Adopting a USD peg means surrendering control of monetary policy to the US and accepting all unintended consequences.

 

Hong Kong provides an interesting case study because of its long held peg to the USD. There have been times when the peg meant that monetary policy in HK had to be kept unduly loose even when local conditions did not justify it – during the early 1990s recession, the US eased aggressively. HK had no choice but to follow and as a result had to endure rampant asset price inflation. Then in the late 1990s during the Asian currency crisis, to defend the peg, HK was forced to raise interest rates to crippling levels at huge cost to the economy and asset prices fell by around 70%!

 

To your own point about the potential massive inflation in the US, won’t we be in a worse situation if we pegged ourselves to the USD? Remaining unpegged may not prevent us from feeling some of the fallout; pegging will ensure that we feel the full effect.

 

A strong currency keeps inflation in check. Although it has taken time for the effects to filter through, Canadian consumers have definitely benefited. Books, cars and electronics are definitely cheaper than they would have been without the C$ strength – it is no longer that attractive to go cross border shopping these days. In an open and competitive economy, there is no reason to think (and no evidence to show) that the middle men are scooping up bigger margins at the expense of others.

 

It is true that many Cdn companies are disadvantaged by a stronger C$ - but this is largely a function of our resource and exported oriented economy. But, if you stop to think about it, C$ strength is often associated with strong commodity prices which must be good for these companies! Didn’t investors in Suncor, Potash, Teck make boatloads of money when the C$ was going from $0.60 to parity (and lose similar boatloads when the C$ weakened back to $0.80)?

 

Then, there are the Cdn companies that sell domestically but may have some USD costs – Tim’s, Canadian Tire, Loblaws, Reitmans, Rogers, Shaw, etc. Surely they are net beneficiaries of a stronger C$. Then, you have the financials – banks, insurers, asset management companies – that are probably neutral to C$ movements.

 

Even if you consider US companies, you can, if you take Buffett’s advice, alleviate the weak USD problem by investing in companies that have significant international earnings or have the ability to increase selling prices because of pricing power.

 

You also have the option, as discussed by others here, of hedging your USD exposure.

 

So, while I agree that a strengthening C$ creates some difficulties for Cdn investors, I do not accept your premise that we are screwed every which way.

 

From a broader economic perspective, while C$ strength can cause problems for exporters of manufactured goods in the short term, provided these companies are flexible enough to respond accordingly, such currency strength should not pose long term problems –consider Japan, which maintained trade surpluses throughout the time its currency strengthened from 260 all the way to 90. Manufacturers found ways to increase productivity to offset the currency appreciation. In an ideal world, strong currency countries should experience very low wage inflation, perhaps even deflation, which will help improve competitiveness in the long run.

 

In the final analysis, we only have to ask ourselves whether we would prefer to live in strong currency economy or a weak one. Would you rather be in China, Japan and Canada or Turkey, Zimbabwe and the US? The answer is obvious. Our goal, as investors, should be to increase our purchasing power over time. If our base currency is a strong one that is appreciating at 5% p.a., then a 5% real return in that currency is not too shabby. On the other hand, if our base currency is one that is depreciating 15% p.a., even a 20% real return in that currency is inadequate.

 

[Cardboard]

The CDN$ is now at around $0.91 to the USD this morning. This is from $0.82 just a month ago. What I am getting worried about is a cataclysmic move driven by speculators that will really hurt our economy. Not to mention the impact on any investment exposed to the exchange rate.

 

Even the British pound is appreciating against the USD. Does that make sense to you? Is there a country on Earth with its banking system and real estate more screwed up than England? Last time I looked its debt to GDP was quite a bit higher than the U.S. even after all the Fed actions. I can't recall any innovation from England in recent past, their manufacturing costs can't be any better than the U.S. and cost of living is retarded. Well, maybe that I have been too harsh with England. I suppose that Spain would also have an appreciating currency if they still had their own!!!

 

I find that hedging properly for such moves is very difficult. You can borrow USD as some mentioned and put the proceeds into CDN$. However, if your U.S. investments don't perform right away and weaken along with the CDN$, you can be in for some trouble. It is not real insurance and you have to be sharp at getting in and out. It is more the game of George Soros vs value investors. I do some of it, but when you realize that you are also exposed via Canadian companies profits being hurt by the dollar you hit some limitations.

 

I have looked at currency options available on the TMX, but they are really expensive. Then you can buy only purely domestic exposed equities. I have a hard time finding interesting ones and maybe that I am not alone since I have rarely seen on this board many being recommended. Even Northbridge was a little USD exposed. Say I propose to you a double exposed to USD and a 50% gainer not exposed, which one do you pick? This is an easy answer under fairly stable exchange rates, but now that you need to know where oil is going to be or after considering the cost or risk of hedging it becomes a little trickier.

 

Luckily my energy and precious metals exposure alleviates some of the pain. It is also true that my CDN$ are now buying me more of the same US securities, but is it really the case? If the USD is going to devalue for good with these speculators not being that crazy and there is no real rebound in the foreseeable future then my share of the World's wealth has effectively shrunk by making these investments unless they appreciate massively. Has the game really changed with this crisis? Is it possible for the CDN$ to go to a new trading range between $1.20 and parity or more for the next decade? I keep hearing that currency effects wash out over the long term, but if we are in it for 10 years it could be life changing.

 

I have noticed that John Paulson and David Einhorn now own large positions in gold/gold stocks. A big call for them. It seems to have been a great move as American investors although, for a Canadian investor the result is so far less so.  

 

Cardboard

[Guest Broxburnboy]

The strength of the CDN is not a temporary, speculation driven event but a reflection of the reality of a debased US currency.  The US dollar's recent strength since the Lehman's bankruptcy, has been the anomaly as the "flight to safety" in the face of a potential global meltdown bid up the international price of US dollars relative to other currencies. Apparently that fear has abated, and the underlying economics are back in play. Look for the Canadian dollar to shortly trade in its pre-Lehman's near parity range.

I see the newly (and hastily contrived) intent of the Canadian government to borrow and spend 50B$ (look for even more)

more than it collects in tax revenue as an attempt to suppress the CDN$ and keep its favorable balance of manufacturing trade. Unfortunately such a policy fights the economic realities... the US must redress its balance of trade to spur its own economy and is pursuing a weak US$ policy (as it must) to that end. For Canadians (and others) who wish to invest in US equities or bonds, a US dollar hedge strategy would be useful.

[alertmeipp]

I think it has overshot.

It will bring down a few sectors with surging loonies and so-so economy.

[Cardboard]

Based on my view of the economy I think it has as well, but I did not take any chance and hedged some of my exposure this week (late to react of course) since I was quite heavy in USD. Something tells me that this thing will overshoot a lot here with all these hedgies out there.

 

I have read somewhere that consensus currently among money managers is that emerging markets is the place to be. So they will pile into foreign names, commodities and producers until something breaks. Chasing returns is their game.

 

With overall mortgage debt in the U.S. not decreasing by a lot and this second large wave of resets coming in 2010 (subprime resets are history, but non-subprime is just starting), it is hard for me to imagine a thriving economy. Then we have Sokol who sees the sales and inventories very clearly warning us that it will take a while for housing to recover.

 

Europe is no better. I think that when most realize that growth in the developed world will be very weak for years to come, that commodities will trend more or less flat from here. This makes them expensive which will favour substitution and with little demand growth if any from the developed world, supply will be adequate to feed China, India and a few other growers.

 

I am also not willing to accept this notion that only the USD will come down. What is so great about the Euro or the Yen? What I see happening is standard of living declining in the developed world due to higher costs (gas, food) and higher taxes to support an aging population with little increase to overall salaries since the developing world is turning capable to do the same for less.

 

Cardboard

[Guest Broxburnboy]

The Canadian export economy is now commodity based and the trend for its manufacturing base (eg auto industry) is to downsize to the point where its production is consumed within the country. Our domestic economy is not burdened with the level of debt they have south of the border, and because of a higher level of savings (social and personal) we can at least in the short run, maintain spending.

The US has recently pumped mega billions into its economy with no effect other than to prevent the implosion of the banking system. Delevering is still the order of the day as outstanding debt must be reduced through currency dilution which internationally means a lower US dollar.

Look for the CDN$ to trade in the same trend as the price of oil as it has done now for several years.

Emerging economies who are not burdened by too much debt will continue to perform well. There is little mortgage debt in these countries (the mass of homeowners have not been considered creditworthy) and consequently there will be little delevering. Commodity based export economies will continue to grow. It's my guess that foreign investment in these countries will increase and "lever up" their growth.

[alertmeipp]

I didn't hedge.

If I have to hedge, i will probably buy AUD instead of CDN.

 

Canada is too much tied to US economy. I don't see Canada do well until US recovers.

 

AUD gives better yield as well.

[Smazz]

I thought I would revive this thread. Its been almost 2 months since the latest postings.

 

Im currently at the stage of doing another Currency Conv. but Im having alot of duality on this subject.

 

Any more ideas guys?  Makes no sence that if the economy is going to the shitter, the USD would accelerate yet, if the general economy is seen to be improving, the CAD/USD would do so. Petro $ or no Petro $ this still defies logic as far as Im concerned - especially between these 2 currencies.