What the Dollar Trends Mean

The Canadian dollar (CAD) has been on a superlative upward surge after breaking $0.90 USD. Many pundits thought the run was overdone, including myself. But to my surprise, the CAD not only broke above par with the USD but also managed to trade close to $1.10 USD prior to the recent retrenchment back towards par after U.S. monetary authorities came out in public support of a stronger USD. If you have read my commentary, you would have known how bullish I had been on the CAD.

 The massive run-up in the CAD and decline in the USD are significant for investors and companies on both sides of the border. For Canadian investors holding U.S. assets and investments, it has meant a strong deterioration in their U.S. assets as far as the Canadian equivalent. For example, if you bought U.S. stock years ago and it has moved up 40%, you would still be at a loss due to the weaker USD. The same applies to U.S. properties owned by Canadians.

 For Americans holding any CAD-based investments, the foreign exchange appreciation has been a boost to their portfolios given the rise of the CAD. Even if a stock is flat, the gains from the CAD are producing some strong returns. For U.S. investors, those not holding Canadian assets or other foreign assets, the decline of the USD has been problematic. The reality is that if you own U.S.- dollar-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 against major currencies such as the Euro and Yen.

 The USD may continue to struggle against the commodity-based Canadian dollar, 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.

 For U.S. consumers, the weak USD means higher prices paid for imports into the country and this will take a bite out of the U.S. consumer. But the reality is that the White House likes the weak USD as it makes U.S.-made products and services cheaper for foreigners and helps to pump up U.S. exports and reduce the surging trade deficit. We just not sure if it is enough, as manufacturing costs are much cheaper in places such as China, India, and other emerging economies.

 There is now pressure on the Bank of Canada to bring down Canadian interest rates in order to drive the CAD lower and help the negative impact of the strong CAD on Canadian goods and services to the key U.S. market.

 The trend for the USD remains to the downside, therefore, you should try to get more non-USD denominated stocks or investments.