I don’t agree with Bank of Canada governor David Dodge, who does not believe the soaring Canadian dollar is the consequence of some very specific market forces. In fact, I am positive our dollar is headed for parity with the greenback sooner rather than later, driven by one very simple reason–Canada’s current account and fiscal surpluses.
The staggering level of debt and deficits in the U.S. will have as its consequence a counter-productive shift among many world currencies. The same force is likely to propel gold past its historic $850.00 per ounce record, as well as push other commodities to new highs.
Just consider the following. Every day, it costs the U.S. government $2.5 billion to finance the country’s staggering current account deficit, and by extension, to support the greenback. (No, this is not a typo; it really costs $2.5 million to protect the U.S. dollar from freefall.) Considering that at the end of 2005, the U.S. current account deficit has devoured 7.1% of the country’s GDP, no wonder the greenback is losing solid footing.
In contrast, in countries such as Canada, which boasts a current account surplus, their currencies are likely to skyrocket in the near-term. Such good tidings for the Canadian dollar are even more certain if and when the U.S. Federal Reserve starts reducing interest rates.
Now, in spite of such bullish outlook for the Canadian dollar, I would never tell you to buy paper. Fiat currencies scare me. However, there are ways to profit from the rising Canadian dollar.
For years, PROFIT CONFIDENTIAL editors have been harping on and on about buying gold, in whatever form you can get it, be it as jewelry, coins, gold stocks, futures, or actual bullion. Even better, if you can, buy gold stocks belonging to companies that report their earnings in stronger currency, and their expenses in weaker currency. This is the case with many companies interlisted on both Canadian and U.S. markets, or with producing mines in Canada.
Next on the list are Canadian energy stocks. In the past 35 years, no significant oilfields have been discovered, until, of course, Alberta’s oil sands, estimated to host about 1.6 trillion barrels of bitumen (crude mixed with sand). Of course, Canadian companies, which report their earnings in Canadian dollars, so far hold the largest stake in the oil sands. And, considering the enormous strength of the energy sector, these stocks have nowhere else to go but up.
Of course, you should stay away from tourism and transportation companies, but look for banks, utilities and manufacturers. The last of the three, manufacturers, are particularly interesting, especially those that import cheap productivity-enhancing products, which are almost a surefire way to boost a company’s bottom line.