Canadian Dollar Continues to Flourish

The Canadian dollar (CAD) just broke the US$0.94 mark to reach its highest level in about three decades. The trend for the CAD is bullish, and according to CIBC World Markets, the CAD could trade at par with the USD by the end of this year.

 For investors in both countries, there are drastic effects on investable assets. For Americans holding any CAD-based investments, the foreign exchange appreciation has been a boost to their portfolios; but for those not holding Canadian assets or other foreign assets, the decline of the USD has been problematic. The reality is if you own USD-based assets such as stocks and bonds, you really need to think about diversifying your portfolio. The trend for the USD is down, and I expect it may continue to drift lower.

 For Canadians, your investable assets bought in U.S. dollars have suffered a decline. Just think: if you bought U.S.-listed stocks a few years back when the exchange ratio was about US$0.54 for CDN$1.00, you would be suffering some significant declines. At the current exchange ratio, U.S. stocks, along with goods and services, are now cheaper for Canadians.

 The USD is trading at a three-decade low against the commodity- based CAD, which has been benefiting from the price appreciation in oil, gold, and metals. With demand from China continuing to rise for commodities, the outlook for the CAD remains bullish at the expense of the USD.

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 The decline of the USD should not be a surprise to you, especially for those of you who have been following the commentaries in PROFIT CONFIDENTIAL, where we have been bearish on the USD.

 The reality is the White House wants the USD to depreciate in order to make U.S.-made products and services cheaper for foreigners and, in turn, help to pump up U.S. exports and reduce the surging trade deficit.

 The trend for the USD is negative, and, as an investor, you need to deal with this. You should try to increase some non-USD- denominated stocks. For instance, you can buy some major U.S. stocks that are interlisted on the Toronto Stock Exchange in Canadian dollars. You can also buy U.S. index instruments, such as the S&P 500, based in Canadian dollars.

 Alternatively, you can buy major blue chip or large-cap Canadian stocks listed on the Toronto Stock Exchange, the major stock exchange in Canada.

 Another strategy is to buy put options on the USD to hedge against further weakness. This strategy would make sense if you have a significant portfolio.

 For Canadians, a declining USD will continue to pressure your U.S. assets. If you have major U.S. exposure, you may want to hedge against additional USD weakness via put options on the U.S. dollar.