Is the Tide Changing for the Canadian Dollar?

Monday, July 24th, 2006
By Inya Ivkovic, MA for Profit Confidential

Stock markets today eerily resemble those of more than two decades ago, mostly because central banks controlled inflation with rising interest rates. The first bear year at the time was 1984, after a shift in interest rates sentiment sent the Dow Jones into a severe down-spiral. The irony was that the DJIA, only days before, hit an all-time high, almost breaking the historical resistance level of 1,300 points.

I was in high school then, so I cannot tell you a story from personal experience. But, I can tell you stories I heard from my mentors who lived and survived those times. In all the stories, there is one common denominator–fear! The majority of traders appeared unable to make a move. Fear had paralyzed them to such a degree that at one point, Government of Canada bonds had no bids for quite a few agonizing hours. And, as it has been the case so many times before, those who acted as designated contrarians profited the most. It was definitely the time to swim against the currents.

The next question is which story is the mainstream one today, but showing signs of a change in fortunes? All things considered, it is the Canadian dollar. Why? Well, for starters, everyone’s buying it, and usually by the time something has become a “common watering hole,” it has already peaked.

Typically, when the U.S. dollar is getting stronger, the Canadian dollar is weakening, and vice versa. These days, however, there is a change in price trends. Instead of diverging, as it has been the case in the past, both dollars are advancing. This is a definite red flag.

At this point, there are several ways to profit from being bearish on the Canadian dollar. Unless you are a sophisticated investor, I would not recommend becoming a currency trader. However, there are other ways to unload the Canadian dollar.

One idea is to identify how particular sectors react to a strong or weak Canadian dollar. So far, commodity prices have aided western Canada, while the industrial base in Eastern Canada suffered. For example, money is flocking to Alberta and running away from Ontario manufacturers. In other words, if the Canadian dollar would fall, forestry, computer, electronic products, auto parts and transportation equipment would profit the most. So, if you wish to sell the Canadian dollar, investing in these industries may be one way to do it.

You can also “unload” the Canadian dollar by buying U.S. listed stocks, but through a U.S. denominated account and in the U.S. dollars. If your broker recommends a U.S. exchange-traded fund, make sure it is not hedged. You want full exposure to the U.S. currency.

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Tags: interest rates, stock market, U.S. dollar