Thursday, September 20, 2007

CDN$ vs US$


So I woke up this morning and all I heard and saw on the news was Canadian dollar talk. Insane how the news outlets really can glom onto a topic and really blow it up from something fairly insignificant into a big deal. I'm not saying that the rise in the Canadian currency is not without consequences but the rise we have had versus the US dollar and other currencies to a lesser extent over the past 4 years has been far more significant than the move over the past week.

I guess the attraction to the story is the psychology involved with round numbers or multiples of 10. I don't know why round numbers have such a psychological impact but they do. Maybe we are all just a little obsessive compulsive.

On a contrarian investing note, it is likely that now would be a good time to invest into solid companies the USA (GE, Pfizer, Johnson and Johnson, Proctor and Gamble, Monsanto, Intel, Microsoft for some decent examples), unhedged to the Canadian currency. On a personal consumption note, it is certainly a lot more attractive to go on vacation to Hawaii, Florida or California now than it ever has been in my memory.

The story really should be about the devaluation of the US dollar and not the rise of the Canadian but we have home country bias and see things through a Canadian lens. I remember hearing Marc Faber say that his investment thesis for the next 25 years was the systematic and competing devaluation of currencies around the world. He said that he expected the US dollar to lead and the devaluations will come in fits and starts but that countries around the world, in order to prop up their exports, will purposefully devalue their currency. I don't know whether his thesis will prove true but it is interesting food for thought. The alternate side of that is that every other country around the world could say 'screw off USA, you are more trouble than you're worth!' I doubt the latter.

28 comments:

solipsist said...

The story really should be about the devaluation of the US dollar and not the rise of the Canadian

I agree, and that story is really much more significant...I think.

The rise and fall of an empire?

mightymouse said...

Well… As a business owner I’ve been sweating for the past year. Most of my product goes to the US. I sense some layoffs coming up.

About a month ago I asked a few of my suppliers for a price break, but alas, I got a long story that didn’t make much sense and basically concluded in “that’s why we can’t give you a better deal’. Looks like I’ll be doing some cross boarder shopping.

In a few years after this construction boom ends and the major Olympic projects are complete and the tourism industry is dead due to high dollar and inflation is outta control… well, I hope people have saved for a rainy day.

Maybe I’m just depressed cause summer’s over ;)

Warren said...

If the US goes into recession I think its safe to say the global commodities market will ease, and our dollar should drop against the USD, all other things being equal.

Good point on US investments. McDonalds of all companies raised their dividend 50% lately.

M- said...

You can find some interesting bigger-picture views on currency valuations at this site. She's a little on the way-out-there theories in some of her posts, but she's got a lot of worthwhile reads.

craigpbbrett said...

It would be worth overlapping that graph with the price of oil in the same period. Canada is the most trade dependent country in the G7 and a third of our exports are energy. Much of the rest are metals that have experienced a similar run up in prices.

Much is made of the US deficit but it's at about 1.5% of GDP this year, which is low by historical standards. It's also on track to move into surplus by 2012.

Warren said...

craig,

Isn't that only if the Bush-era tax cuts expire? Which is political suicide for just about anybody.

Plus all of the future commitments they have with social security, health care, etc.

The US economy is far from weak, but I'm glad I'm in the 10-straight-year surplus country.

Being an energy exporter is always a good thing. Of course oil will not be around forever, but we do have plenty of renewal resources: water, lumber, and potentially electricity through hydro.

stan said...

Anyone have any comments on this story?

If it is true then it is fairly frigtening consequences which I feel could heavily effect the exchange rate for a long time into the future.

http://tinyurl.com/3dy3oz

Deliverator said...

Stan, it only makes sense. If the vast majority of your savings were in USD, and you've watched them decrease in value by ~15% over the past couple of years, wouldn't you look to diversify? If you've pegged your currency to the dollar, and are facing increased inflation due to the increase in money supply (caused by the Fed dropping rates to fight deflation in the US), wouldn't you look for a solution? I agree that it bodes ill for the USD, as well as the US stock and bond markets, but it can't be unexpected.

craigpbbrett said...

I'm not sure you can be both doubtful of the US economy yet optimistic the Canadian economy will be fine.

Some 86% of our exports go south. And I would never be too thankful that my economy rests on the pricing of commodities.

Strataman said...

warren "The US economy is far from weak, but I'm glad I'm in the 10-straight-year surplus country."
That surplus wiil fast reverse if the dollar stays at par, in fact US economists expect the US trade balance deficit to shrink due to the week US dollar. Ours will grow.

patriotz said...

US economists expect the US trade balance deficit to shrink due to the week US dollar. Ours will grow.

One, the root cause of the US trade and current account deficits is their negative savings rate. In other words, the country is living beyond its means. US$ devaluation is a symptom of this, not the cure.

Two, Canada doesn't have a trade deficit, it has a surplus. Perhaps that may go down a bit, but not a lot I think because of the low elasticity of Canadian energy exports to the US.

freako said...

The story really should be about the devaluation of the US dollar and not the rise of the Canadian

Definitely, though oil has boosted the loonie versus most world currencies.

If the US goes into recession I think its safe to say the global commodities market will ease,

That is my line of thinking, and that is why I think the talking heads that are quoted in the MSM too optimistic when they say "it won't happen here because of our strong economy". A strong economy is the result of circumstances, nothing else. If those circumstances change ...

It would be worth overlapping that graph with the price of oil in the same period.

I betcha you'd see a strong correlation.

One, the root cause of the US trade and current account deficits is their negative savings rate. In other words, the country is living beyond its means. US$ devaluation is a symptom of this, not the cure.

Yes, that is exactly how I see it. The end of MEW's will close the gap. The other story is the effect this will have on China's economy (which affects Western Canada specifically) and also the long rates.

Two, Canada doesn't have a trade deficit, it has a surplus. Perhaps that may go down a bit, but not a lot I think because of the low elasticity of Canadian energy exports to the US.

True that but if U.S. goes into recession, oil would take a hit, and both the quantity and value reduction in exported petro would reduce it.

rentah said...

Here's my contrarian take:
EVERYBODY expects the USD to collapse here.
All news stories take that line.
Has anybody read ANY analyst who is bullish the USD? Exactly, there are almost none.
You may be interested to know that commercial traders have been building up large long USD positions.

THUS, look for the USD to bounce here, perhaps sharply.
-----

The Markets are at a very sharp pivot point: loonie at par, USD at decade lows against other currencies, gold stocks at exactly the equivalent of their 2006 peak: we'll either extend all these trends decisively, or we'll bounce back (also decisively).
Feels like no-man's-land right now.

Damir said...

You can look at loonie vs crude here...

http://stockcharts.com/h-sc/ui?s=$CNd:$WTIC&p=D&b=5&g=0&id=0

Adjsut timeframe as desired. Non-paying users are limited to 3 years of data, but it goes back a lot longer than that.

While the ratio bounces around quite a bit, loonie vs crude is currently right about where it was in late '04.

I'm in the same camp as those of you who argue Canada - esp. western Canada - cannot hope to stay immune from a US consumer recession (should one happen).

M- said...

Rentah, for what it's worth, I run a FX quant fund that trades the EURUSD. Right now, the system is predicting that the EUR has another 7-8 cents to gain before it reverses. Based on past history, I estimate this will take around 4-5 months, if the system is correct.

On the side of contrarian investing, while it may be that everyone expects the USD to drop in value, the market's momentum right now is strongly against the USD, making any sudden recoveries unlikely.

My personal opinion, quant fund or no, is that the USD's major underlying direction will continue to drop until they get themselves out of Iraq. If they start another war in Iran, things will move even faster against the USD.

Warren said...

strataman: That surplus wiil fast reverse if the dollar stays at par, in fact US economists expect the US trade balance deficit to shrink due to the week US dollar. Ours will grow.

Sorry I was referring to the budget surplus. Trade surplus I saw somewhere was 32 quarters straight, so 8 years.

Certainly there are impacts to a high C$, but as patriotz suggests, the demand for energy is fairly in-elastic from our friends in the south, and our new friends across the sea have plenty of demand for Canadian energy and raw materials.

Like Alberta has recently done, I think the government needs to stick to a long term debt repayment plan, so that by the time oil runs out (because it will), we are in the best financial position we can be in.

Warren said...

Can anybody explain to me how a country goes about fixing its exchange rate? From what I understand, China fixes theirs against the USD, and recently adjusted it, but by all indications it is still grossly undervalued. What impact would a falling USD have on China and what might they do to fix it?

Gabriel said...

The USA isn't in a recession yet, thou with all the negative sentiment you'd think that commodities should of stabilized or head lower instead of heading to new highs.

It maybe that the world economy isn't as dependent on the USA economy anymore, after all US only represents 12% of GDP.

Gabriel said...

I meant to say 12% of world GDP

freako said...

WHere do you get your figures Gabriel. This is two years old, but still:

http://hir.harvard.edu/articles/1287/
"The United States currently produces just over 30 percent of total gross domestic product (GDP) when measured at market exchange rates, or 21 percent at purchasing power parity (PPP) rates"

rentah said...

m- said: Rentah, for what it's worth, I run a FX quant fund that trades the EURUSD. Right now, the system is predicting that the EUR has another 7-8 cents to gain before it reverses. Based on past history, I estimate this will take around 4-5 months, if the system is correct.

m-, thanks for the comment.
Interesting prediction.
What is the model taking into account?
Out of interest, does it have 'black-box' AI components?

I'd imagine that any model that takes into account recent action is going to be strongly biased towards predicting continuation of the trend.
How good are quant models at predicting turns?

As usual, we'll have to stay tuned.

Gabriel said...

http://research.cibcwm.com/res/Eco/ArEcoMI.html

It would be the Aug 16 report StrategEcon. I tend to only follow CIBCWM, TheEconomist when I look for data regarding economies. If you know any other sources I'd like to be able to broaden my spectrum of opinions.

I'm quite new at investing in general.

Keep in mind that there are more reports since Aug 16 from CIBC and they refined their outlook, if you disagree with some of what they say on Aug16.

freako said...

Ok, Gabriel, I took a look. Off the top of my head, your figure seemed about half of what I expected.

Your 12% figure is not percent of world GDP, but 12% of GDP growth. The U.S. STILL accounts for 25 to 30% of world GDP. But as per the growth figure, this is decreasing.

WoodenHorse said...

Did the recent FX changes put Vancouver in the top most expensive city?

freako said...

I don't think so, but only because the median is still rising in Sanfranciso/Oakland/San Jose. As soon as the sales mix returns to normal, these medians will drop 10% plus, which would to the job. To compare we need the GV median.

M- said...

Rentah, my fund looks primarily at the last few months' moves to decide where it's going to go. No AI; my company doesn't have any "real" programmers. Just a few of us doing this for fun.

The system picks entry points very well-- the biggest failure is that it has trouble dealing with choppy conditions. It predicts major turns fairly well, but makes too many trades when conditions are frothy.

patriotz said...

Can anybody explain to me how a country goes about fixing its exchange rate?

In the case of China, which has a huge trade surplus with the US, they just sell 7 yuan (or whatever) for one dollar. This only works if the currency is undervalued. It's easy to run down the exchange rate of your own currency.

The downside of this is that you create inflation in your own currency, as China is experiencing right now (with some unrest). The 64 trillion dollar question is when this will come to an end and what the effects will be.

There are more sophisticated schemes called a "currency board" where a country keeps reserves of some foreign currency and uses them to back up its own currency on both a buy and sell basis, rather like the way the old gold standard worked. HK does this, and also some places like Estonia I think.

And of course there used to be a lot of countries (in Africa, ex-Soviet Bloc, etc) that had some "official" exchange rate that had nothing to do with reality. The real exchange rate was determined on the black market.

rentah said...

m-:

Thanks for the info..
let us know how it's doing.