Canadian Dollar Poised for Long-term Strength
With the monthly jobs reports out in various countries, the news that the U.S. created only 120,000 new jobs in March was certainly less than expected; especially when you consider the trillions spent by the government trying to “stimulate” the economy. All we have left is a massive U.S. deficit. But in some countries there have been big job gains—Canada is one of these countries. Last month, the Canadian economy created over 82,000 jobs. With a population approximately 1/10th the size of the U.S., it would be the equivalent of the American economy creating 820,000 new jobs in March!
This situation already has my attention, as do investments based in the Canadian dollar. The Canadian dollar has already strengthened from a low of CAD$1.0657 to buy one U.S. dollar in October 2011 down to only CAD$0.9976 to buy one U.S. dollar. With the U.S. deficit pegged to hit and possibly exceed $1.3 trillion this year, this can’t help the U.S. dollar. In fact, I think this push to lower the value of the dollar is the explicit policy of the administration and this will help the Canadian dollar. How? Additional monetary stimulus (money printing) has devalued the U.S. dollar and pushed up commodity prices before and will do so again. Canada sells commodities, tons of them; from oil, to gold, to wheat and almost everything in between. The higher commodities go, the higher the Canadian dollar goes. This is combined with the fact that the Canadian government is very well managed financially, with some estimating that the Canadian budget deficit for this year will only be $20.0 billion. Their government stated that they expect a surplus by 2015-16. How long until the U.S. budget deficit disappears? Honestly, it could be decades, as I don’t see any political will to change the direction and with it we will see the U.S. deficit continue to soar.
With the U.S. deficit still deep in the red, more investors are going to flee the currency and look towards safe countries with very attractive investments like the Canadian dollar. Not only is it very easy for an American to invest in assets backed by the Canadian dollar, but also the country has everything the world needs for the next century. Unless you really believe we won’t be eating anymore food or using oil and gas to heat our homes and drive our cars. Investments based in the Canadian dollar look very attractive.
Chart courtesy of www.StockCharts.com
For those who want some exposure to the currency, but don’t want to trade the spot Canadian dollar, there is the Currency Shares Canadian Dollar Trust (ETF/FXC). The FXC moves inversely to spot USD/CAD, meaning a move up in FXC will occur when the Canadian dollar strengthens. As we can see, the move up in the Canadian dollar from the October lows has hit a plateau level. Obviously the Canadian government doesn’t want a massively overvalued Canadian dollar; but remember that the Bank of Canada has only one mandate: price stability. Bank of Canada Governor Mark Carney has been a strong voice in letting the markets know that inflation will not be tolerated. With inflation rates creeping higher, we will most certainly get a rate hike in Canada sooner than in the U.S., which should help move the Canadian dollar higher. That most likely won’t happen over the next couple of months. If we look out several years, I see no end in sight to the sky-high U.S. deficit and a country—Canada—that is close to raising interest rates and expected to have a budget surplus in a couple of years. Having some investments based in the Canadian dollar makes a lot of sense to me.