One of the main drivers of the recent “bull run” we have been experiencing for the past six months has been the mining and oil sectors. The price per barrel of oil has gone from a low of about $37 to about $66, and the price of gold has returned to all-time high levels, trading at more than $1,000 per ounce. Canada, being rich in natural resources has seen its stock market and currency rise tremendously in relation to these sectors. However is a strong dollar good for this country’s prosperity? Many would say no.
The Bank of Canada has gone on record stating that a strong loonie could act as a headwind against the Canadian economy. The central bank has said that if they have to, they will intervene to keep the dollar from rising so to a point where it could ultimately stop an economic rebound.
A strong dollar also presents a large problem to an already battered manufacturing sector. All goods that are shipped to the United States from Canada become a lot more expensive for Americans to purchase. There is already a hint of the Buy American protectionism in the U.S., and more expensive imports would only make things worse. Other areas, such as tourism and the film industry, become too expensive as well. Toronto and Vancouver — once called “Hollywood North” — have seen a tremendous slowdown in TV and film making. What once was a multi-million dollar industry has shrunk significantly, due in part to a strong Canadian dollar.
Many multi-national companies in Canada will have their profits eroded by the strength of the loonie when they report their quarterly performance numbers in Canadian dollars. A strong currency can make a good quarter seem ordinary
Does our currency deserve to be so strong? With unemployment above 8.5%, a manufacturing sector in repair and many small business owners still unable to obtain the credit they require to conduct business, I don’t believe so. Because the main driver of our currency is oil, the loonie has been called a petro-currency, and that description seems to be more and more appropriate each day. Canada is becoming a country mainly focused on oil and mining, and thus our currency will fluctuate tremendously with those sectors. In my opinion, our currency does not exhibit strength, it is simply very volatile.
The average conversion price of one Canadian dollar to one U.S. dollar has been approximately 85 cents for many years. Thus, as the Canadian dollar starts to climb above 90 cents, it gets further from the norm, and purchasing U.S. dollars at this level or higher becomes a good option. If we believe that things over time revert to the norm, there is a good chance an investor will make money from the currency exchange at some point in time. This is why purchasing good quality companies in the U.S> makes sense when the Canadian dollar rises above 90 cents. Not only would you be purchasing a good company that can go higher on its own, but you will hopefully have currency gains as well. In my opinion, in this market environment, you want to look for good quality U.S. dividend paying companies or good muti-national U.S. companies that derive a good portion of income outside of the U.S. These two types of investments should provide good returns on investment and a currency gain with the Canadian dollar trading so high.
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Allan Small is an Investment Advisor with Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities and the author is not a Dundee Securities analyst. The views expressed are those of the author alone, and are not necessarily those of Dundee Securities or Metro Canada.