SACO INVEST

Fůrum da Saco Invest
 
HomeHome  FAQFAQ  SearchSearch  RegisterRegister  MemberlistMemberlist  UsergroupsUsergroups  Log in  

Share | 
 

 The Effects of a Soaring Canadian Loonie

View previous topic View next topic Go down 
AuthorMessage
gastaoss



Number of posts : 440
Registration date : 2007-07-01

PostSubject: The Effects of a Soaring Canadian Loonie   Thu Nov 08, 2007 8:56 pm

Until recently, the dampening effect of a soaring Canadian dollar has been largely offset by rising prices for Canadian commodity exports. However, the run-up this year to $1.02 (U.S.) in the Loonie now has the currency substantially outpacing commodity price gains. Specifically, since 2002, the trade-weighted Canadian dollar has appreciated nearly 40% compared to the 20% gain in the terms of trade (export prices relative to import prices, as reported on page 16 of the Bank of Canadaís October Monetary Report).
The Canadian dollar is clearly overshooting, increasing risks to the downside for the Canadian economy -- especially considering demand is softening from main trading partner, the U.S. That is one reason why the Bank of Canada chose not to raise interest rates at its policy meeting this month. And given the slowdown in the U.S. may still have a way to go, the U.S. dollar could be under further pressure to decline against the Canadian dollar. This, in turn, will exert more deflationary forces on the Canadian economy that the Bank of Canada may have to eventually counter by lowering interest rates.
We may have seen this movie before. Back in the early 1970s, the Canadian dollar was as high as $1.05 [US] and when this overvalued exchange rate triggered high unemployment, the Bank of Canada responded by aggressively easing interest rates. The federal government, with the NDP holding the balance of power in Parliament, also aggressively eased fiscal policy. The result was a domestic boom that ended up igniting inflation, decades of government deficits, and a multi-year decline in the Canada dollar to a low of $0.65 (U.S).
Things are different this time around in that central bankers are more focused on containing inflation. It is unclear to me at this stage how this difference in focus will interact with the problems the U.S. is once again exporting to the rest of the world. Will it imply lengthy periods of elevated unemployment and underutilization in the economy of Canada and other U.S. trading partners, or will politics intervene and produce a repeat of history? Or will it imply something else altogether different?
CurrencyShares Canadian Dollar Trust ([url=/symbol/fxc]FXC[/url]) 1-yr. chart:
Back to top Go down
View user profile
gastaoss



Number of posts : 440
Registration date : 2007-07-01

PostSubject: The Effects of a Soaring Canadian Loonie - Part II   Thu Nov 08, 2007 8:58 pm

Itís incredible. The Canadian dollar reached $1.10 (U.S.) in trading Tuesday night. Having lived through the era of a $0.65 (U.S.) loonie, Iím truly astonished to see the heights to which our currency is soaring. And now, with oil, gold, wheat and other commodities on meteoric paths upwards, analysts think the bird could go even higher.
Consequently, it now looks more certain that the downside risk for the Canadian economy has become material (see my Oct 19 post, The Effects of a Soaring Canadian Loonie, for more details). It also looks more certain that inflation and interest rates will be tumbling in Canada.
One thing investors can do is go shopping for U.S. financial assets. The soaring loonie has dramatically boosted Canadianís purchasing power for anything denominated in U.S. dollars.
But what to buy? If you have a passive, low-cost approach to investing, you could consider broad-based U.S. exchange traded funds (ETFs) with ultra low management expense ratios (MERs). Three main ones are:
1. Vanguard Total Stock Market ETF (VTI) has a MER of 0.07%

2. SPDRs Total Market DJ Wilshire 5000 (TMW) has MER of 0.2%

3. iShares Russell 3000 ETF (IWV) 98% of market and MER of 0.2%
The PowerShares QQQ (QQQQ) might be of interest too if you believe in history repeating. This technology-laden ETF should perform well if the 2000s turn out to be like the 1990s, as some analysts are expecting.
That is, with the subprime crisis now compelling the Federal Reserve to slash interest rates, it could be like the 1997-1998 financial panics (Asia, Russia, and Long Term Capital Management) that led to the Fed pumping up the economy to stave off financial meltdowns. U.S. corporations presently have quite healthy balance sheets and further stimulus will only give them even bigger budgets for spending on capital goods.

QQQQ 1-yr. chart:
Back to top Go down
View user profile
 
The Effects of a Soaring Canadian Loonie
View previous topic View next topic Back to top 
Page 1 of 1
 Similar topics
-
» Effects of privatization of gvt enterprises ??
» Overnight devaluation to have short term negative impact
» Rising Interest Rates Vs Stock Market
» Today Chinese New Year - Dragon effect?
» US resolution: What will the impact on Sri Lanka be? Brief insights from Asia Wealth

Permissions in this forum:You cannot reply to topics in this forum
SACO INVEST :: SACO INVEST-
Jump to: