Monday, May 28, 2007

Canadian vs. US Dollar

The recent and rapid rise of the Canadian dollar versus the US dollar has left many investors (myself included)watching the share price of their US holding appreciate while the value of those same holdings are depreciating. This has left many investors wondering what’s next for the Canadian dollar...are we at an all time high? will it continue to rise? Are we going to par? Etc... Obviously, I don’t know the future and am not employed or trained as an economist but I do have some general views of the Canada vs. US dollar situation and a prediction of where the Canadian currency is headed (please take my opinion as one of many various opinions and certainly do not base your own financial decisions on my opinion)

Basically, I don’t see the CDN dollar staying at these levels for an extended period of time. I think that any significant increase above our current level will be unsustainable for the Canadian economy and here are my reasons why:

•About 80% of Canada’s trade is with the US.

•We are basically a petro-currency. If/when the demand for oil/gas decelerates so will the demand for our dollar.

•Exports to the United States account for approximately 40% of Canada’s GDP.

•The high CDN dollar is starting to discourage Americans from vacationing and shopping in Canada.

•If the dollar increases substantially more it has the potential to decimate our manufacturing and exporting sectors (particularly in Ontario and Quebec).

I believe that the CDN government cannot afford to let the CDN dollar appreciate too much more against the US dollar (unless Canada as a nation can start to develop large, sustainable exporting relationships with a country/countries other than the US). That being said I’m not encouraging everyone to go out and load up on US dollars or securities. However, if you were contemplating adding some US positions to your portfolio right now may not be a bad time. Although I’ve recently increased my holdings in JNJ only about 30% of my portfolio is invested in American companies and I don’t plan in increasing it much beyond that level.

(Disclaimer: I’m not your boss or your spouse so do you own research and make your opinions on when to buy or sell. Nothing I say should be bastardized or construed in any way to be advice)


Tim Stobbs said...

Another idea I've heard of doing is moving a good size amount of cash over to US dollars and waiting for the CDN dollar to drop.


Thicken My Wallet said...

One of the strange things that has happened is that gold prices have not risen while the USD has fallen (as is usually the case). Perhaps it may also be time to look at gold because history indicates that as one goes down, the other goes up.

Anonymous said...

I also added more JNJ this morning because of the attractive exchange rate, shortage of pharma in Canada, and, well, it's JNJ!!!

Anonymous said...

The Bank of Canada is in a weird situation. Either drop the interest rate to decrease CDN dollar but therefore leave inflation increasing as the price of oil is going up. Or, increase the interest rate to control inflation but participate in the CDN dollar jump. The fact that many Canadian companies have been bought recently. That also increase the demand for CDN dollar.

MG (moneygardener) said...

If one believes that the Canadian government will not allow the CAD$ to get close to the USD$ in value then one should be loading up on U.S. securities as the CAD$ rises. I for one agree with you MCM, however am I confident enough in my opinion to load up on U.S. stocks because of this???

It's much easier to buy companies when you deem them good value, rather then make a currency bet at the same time.

Anonymous said...

I agree with you investor99. Companies have to be good value before currency is even considered, otherwise you should simply do as Canadian Dream mentioned and load up on American Dollars. Personally, I'm only willing to have about 40% of my portfolio outside of Canada, currently I only have 30%.

telly said...

I hope you're right! As a cross border commuter being paid in $US, I've been getting a pay cut for years because of the exchange. :(


Excellent post on dollar.