Benefit from Canada’s Strong Economy via Multinationals

The Canadian dollar staged a strong upward climb to US$0.90 in October 2006 from US$0.62 in January 2002, as it was driven by strong commodity prices in oil and metals such as gold, silver, copper, nickel, and uranium. The commodity-based Canadian dollar has been faltering since it was trading at US$0.90, due to softness in oil and precious metals, but it appears to have some decent support at US$0.84.

If you have followed Profit Confidential over the past several years, then you already know how bullish we have been in our outlook for the Canadian dollar against the U.S. dollar.

As an investor, you can benefit from a strong Canadian economy and the Canadian dollar by investing in large multinational companies that have a strong presence in Canada. U.S. companies include Proctor & Gamble Co. (NYSE/PG), Wal-Mart Stores Inc. (NYSE/WMT), and Dell Inc. (NASDAQ/DELL), to name a few. Alternatively, you can also buy blue-chip Canadian stocks or Canadian index funds that are denominated in the Canadian dollar. This allows you to achieve currency diversification in your portfolio.

The Canadian dollar is now at a crux and looking for some sort of direction after it failed to hold after a recent upward move to above US$0.86. The near-term technical picture for the June Canadian dollar on the International Monetary Market (IMM) is moderately bearish, so we may see another downside move toward US$0.84. The Relative Strength is relatively weak and needs to pick up in order to support a sustainable run in the Canadian dollar.

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My feeling is that the Canadian dollar will continue to trade off in the direction of commodities, especially oil prices and metals. There is key resistance at the four-week low of US$0.8676 and the 100-day MA at US$0.8710. A strong break at the 200-day MA of US$0.8869 could drive the Canadian dollar back to the US$0.90 level. Again, should the key commodities stay soft, the Canadian dollar could pause and see downside pressure.

Overall, I like the Canadian dollar, but I really doubt that it can trade higher than the U.S. dollar, which is something that happened in the mid to late 1970s.