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Thoughts on USD/CAD


no_free_lunch
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Having been burned in the past on american investments as a result of the canadian dollar strengthening I wonder what people's thoughts are on the future of the USD/CAD rate?

 

On the one hand the CAD is quite strong right now but perhaps mainly as a result of relatively high commodity prices.  It is also strengthened by the lack of serious financial crises / budget constraints.  Should resource prices crash that could revert the strong canadian dollar I would think.

 

On the other hand, the US continues to run massive trade deficits / budget deficits and it has been speculated that this cannot be maintained in the long run without weakening the US dollar even further. 

 

I wonder if anyone has put any thoughts into this or is aware of any reference materials / studies on the long-term prospects for the two currencies?

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I don't move monies to Canada or US to speculate on currencies. Many stocks trade in both US and Canada so when I buy or add, buy in the currency that I think will weaken and sell in the currency I think will strenghten. Currently I think the Canadian dollar will strengthen short term then weaken. There are many factors to consider. Competitiveness matters in the long term. Almost everything from houses to clothes to wages (except for government sector) are way cheaper in the US so the Canadian currency will eventually weaken. Capital flows determine currency in short term. Central banks and sovereign wealth funds have major problems which now cause them to diversify into Canadian dollar holdings. This is the main factor I believe which is causing our currency to rise. This trend will continue. The currency also rises because of massive proportional inflow of rich immigrants, which inflows appear grossly understated based on the number of housing developments. Part of that could be the practice of sending children to our excellent public schools then buying a condo for the child and parent while they attend school. Public schools like foreign pupils as they get something like triple the cash per pupil. The Canadian dollar will also weaken when the market wakes up to the fact that we suffer from a 25% or so fall in the export price of oil due to the lack of pipelines and domestic regulatory obstacles preventing cheap domestic refining.

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Aberhound, thanks for the feedback, it is actually a little bit reassuring. :)

 

I am certainly not looking to speculate on currencies, quite the opposite in fact.  The main issue I face is that I am continually confronted with better investment opportunities in the US, simply due to more analyst converage and a larger selection of equities.  My investment returns have been limited by the exchange rate over the past decade as it had slid from 1.5 CAD/USD to parity.  I just want to see if there is a consensus that this slide will simply continue indefinitely.  I would prefer a world where the exchange rates are fixed and I don't need to think about this complexity but if anything it seems likely the volatility will only increase.

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Thanks for the post Mark.  You seem to have your head on straight so I respect your opinion.  I like the part in your article about the dollar collapsing and how life just moves on.  That is exactly what scares me about my US based holdings.  If you had asked me in 2000 what would happen if the exchange rate to parity I would have given some drivel about how it couldn't happen because this would basically crash the Canadian economy which would cause the Canadian dollar to weaken again.  Nope!  Turns out economies can handle a lot more stress than people give them credit for.

 

Just out of curiosity, you said that you had predicted the dollar would hit parity a decade ago.  Care to hazard a guess where the exchange rate will be in another 10 years?

 

Also, Canada has a number of problems of it's own.  I think we have been blessed with high commodity prices in the western parts of the country and that coupled with low interest rates has kept the economy going.  Long term, however, this can reverse itself.  Do you not see the potential for similar budgetary problems in Canada as well?

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  • 2 weeks later...

Sorry for the delay replying.

 

Oddly, since the GFC (which I was bracing for long before), I have realized that nobody can predict the future. While it's true that I had the good fortune to be largely unscathed during the meltdown, even though I was "waiting for it" it still unfolded in completely surprising ways. Example: I thought gold would skyrocket, but it didn't, it got hit with the deleveraging just like everything else.

 

Since then I've realized that prediction is useless, even if you're right! Well for me anyway.

 

Out of that experience my methodology evolved: instead of predicting what is going to happen, I try to understand what is actually happening. In other words, I think the essence of successful investing is in understanding the present rather than predicting the future. I think this is the crux of value investing (which basically discovers valuation errors now, rather then speculating on the future price action).

 

What we are seeing now is a currency in the process of losing it's reserve status. There are new "theories" like MMT or MMR which rationalize away (like a drunk who wants to keep on drinking) on why this is not happening. Any critical examination of them show them to be pure bunk.

 

This destruction of the USD is happening against a backdrop of a worldwide race to the bottom in all currencies.

 

If this is true, then it means that somewhere in the future there will be a new monetary regime and a big reset. Who knows when, 10 years, 20 years. Next month.

Impossible to say when.

 

The other thing I realized since all that GFC stuff happened was that I was missing the point by avoiding US equities, which I did for years. If you are afraid of the currency, then don't go long the currency by holding cash, buy companies that can weather the currency decline better, either through having solid non-USD income streams, or having the ability to raise pricing in line with inflation or both.

 

It's my 2 cents.

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