The
Canadian dollar appreciated eight per cent versus the U.S. greenback last month -- the best monthly performance for our currency
versus the U.S. dollar since 1950. The Canadian dollar ended last week slightly below 92 cents, a tremendous increase from the 79-cent range it
traded in just a few months ago.



Many of us like a strong dollar because their travels to the
United States become cheaper, cross border shopping improves and imports from the U.S are less expensive. However,
where this thinking fails is that a strong
Canadian dollar combined with rising unemployment in the midst of a
recession only makes matters worse for our economy.



The federal government just announced one of its largest deficits ever. At the same time we are enduring an eight per cent unemployment
rate and Canada’s GDP numbers
continue to fall with each passing quarter.

With all this negative
data, how is it possible that our dollar is gaining strength?

Most economists believe that it is not necessarily the strength
of the loonie, but the weakness of the U.S. dollar that is fuelling the rise. The United States government continues to
increase its money supply, while maintaining a strategy
of quantitative easing that dilutes the value of its currency. Thus,
most currencies around the world -- and not just our own -- have appreciated versus the U.S.
dollar.



When the U.S. dollar declines in value, it has a direct effect on the
pricing of hard assets such as gold, copper and oil that are priced in
U.S. dollars. This explains why we are seeing a surge in the price of
oil -- which has almost doubled in the past three months -- and gold, which is approaching
$1000 an ounce.

 

Some may think that these commodities are
surging due to supply and demand fundamentals, however, I maintain that this is just
a shift in psychology out of the safety of U.S. dollars and into more
risky hard assets to take advantage of a rebound in the world economy while also providing protection against possible inflation in the future. The
Canadian dollar is looked upon as a petro-currency and therefore is
rising in step with the rising price of oil.



I do not believe that the current price of our dollar can be sustained because of all the economic negatives working against it. The United States is our number one trading
partner, and their consumers have continued to cut spending as they
grapple with their own recession. If the Canadian
dollar were to remain at these levels or higher for a prolonged period
of time, not only would it prolong the agony in Canada, it
could possibly cause our country to sink further into recession as
our exports become less affordable to U.S.
consumers. Our manufacturing sector is already struggling with the
current economic situation. If our exports get too expensive it would
only make the situation worse, to which the pulp and paper industry serves as a great
example as it continues to shed jobs as the price of the dollar
weighs on profits.



The Canadian economy continues to struggle, yet for the time being the
United States seems to be doing worse. However, our dollars rise on the back of inflated commodities prices can only last for so long. Eventually
the speculators driving the values of our dollar and our markets will
realize our economic situation is not much better than the U.S. and
will begin to sell off our Canadian dollar once again. In the meantime,
as investors, you should look to take advantage of a strong dollar by
purchasing shares of good quality U.S. companies. With our dollar
approaching 92 cents, it may be possible to gain an extra five or ten per cent in
currency gains (when the U.S. dollar eventually strengthens) on top of
possible capital gains by purchasing well valued U.S. investments at
this time. If you are able to purchase an investment that pays a good,
stable dividend as well, that would be an ideal investment.



With any quick, large swing in the markets (currency, commodities or
stock market), there always exists an opportunity to be exploited. May’s currency increase is no different.

If you have any questions regarding the above article or are looking for an Investment Advisor to help you with your portfolio, please send me an email at asmall@dundeesecurities.com. I will be glad to speak with you!

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.

Latest From ...