The Canadian Dollar (Canadian interest only)

[Sam Gamgee]

For Canadian posters: I wonder if anyone has an opinion where the Loonie is going these next few months?

I regard the Loonie as a function of:

1) The current bear market trend of the US Dollar - it seems the fall in the US Dollar has stalled out - any other opinions?

2) Price of Oil - Surprisingly the Canadian Dollar has stayed strong despite a 15$ shave in the price of oil. What gives? I expect oil to be back around the 70$ mark in the next few months

3) The Cubanization of Canada - This may be a long term factor on the Canadian dollar. It is obvious that we are essentially a socialist dictatorship. As the world starts to see that for themselves, will this contribute some weakness the the Canadian Dollar?

[drtom]

It's not quite that simple, Sam.

You need to include the status of the respective economies. Canada is the only G8 country that produces a surplus (and has done so for the past 7 years) - this attracts interest from international investors. Loonie goes up.

The US debt is in the trillion range. China owns 250 billion in Gov't bonds. This spooks investors. Dollar goes down, Loonie goes up.

Oil is only part of Canadian exports. If crude goes up, it adds to the surplus but if it goes down, it doesn't kill the surplus. Kinda like gravy. Markets love that. Loonie goes up.

Keep in mind that most of the world hangs out on the left end of the spectrum. What you scoff at, they find attractive. But either way, the business world couldn't care less about the political direction of a country. We condemned China for crushing a democratic uprising and increased our trade with them dramatically. So, no, don't hold your breath for the rest of the world buying into your "cubanization".

Finally, interest rates. The Fed can't keep raising interest rates as it will cool down the economy. After a period of very low rates there is so much debt out there that raising the rates over a certain threshold would be suicide. So, international interest in the dollar can't be stimulated much more by rising rates.

Leaves the upcoming elections in your country. If the conservatives win, relations and trade with the US will be stimulated, Loonie goes up. If the Liberals win, the rest of the world will see that as "staying on a proven track", perceive it as stability and Loonie goes up (keep in mind, the world couldn't care less about sponsorship scandals and such). Only if the NDP won some investors might consider the economic climate to change. Since that's not going to happen either: Loonie's gonna go up.

My guess, a 90+ Loonie by next June.

[Sam Gamgee]

You mean the fiscal surplus of Canada, right? But that was only achieved by the Federal government absolving its fiscal responsibility on healthcare - the biggest portion of any budget. By passing the buck to the provinces, yeah, they have managed to create a surplus. And add to that serious underfunding of the military.

I agree the US Dollar will go down. 78 cents was the low on the US Dollar Index in the 1980s. I'm guessing as far as 68 cents? But of course not in the next year.

Oil is the only meaningful export. Auto and auto parts are a dead in the water industry, especially with the strength in the Loonie destroying their export value. The lumber industry is in a coffin. I suppose base metals have risen, but that has been compensated by the rise in the Loonie.

It seems Cubanization keeps investors away from nations such as those in South America, Africa, ect... Most wise investors wouldn't touch those places unless they are very well diversified. But what you said makes sense.

Are you serious that the world doesn't care about these scandals? That's what made me think of Canada as Cuba North to begin with. That kind of muck is what banana republics get messed up in. The Conservatives will not win. That's what I meant by socialist dictatorship. I am convinced we will have a Liberal dictatorship forever. I would think that would cause the world to laugh at our foolishness.

[Sam Gamgee]

Thanks for the analysis by the way. 90 cents isn't the greatest of news. It makes commodity investing a bad play, since commodities that rise in US dollars, may very well fall in Canadian dollars.

[drtom]

You mean the fiscal surplus of Canada, right?

Yup. And I also agree with you on how it was achieved. Yet again, international businesses don't care if your people have to stand in line for hip replacements. Plus, despite public outrage about your tax rate - compared to let's say Germany (a country I have to travel to quite frequently) it's heaven. Aside from being overtaxed, they now want to raise their version of your GST to 19%. They pay between 800-1700 Euro health insurance each month and so on.

Re not wanting to deal with South American socialist dictatorships, you are right, but: most of these countries have little to offer. China is the biggest dictatorship in this respect, and G8 countries are standing in line to do business with them. I guess 1.25 billion people is a convincing argument for some. Just imagine, their number AFTER the decimal point is the entire population of the US. It's like being Donald Trump: no one tells you that your hair looks stupid when you're rich...

[Sam Gamgee]

Very good point. 1% of the American population keep Michael Moore in business. Imagine what 1% of the China population can do to the bottom line. I think last year some hydro electric project used something like 40% of the annual world production of cement.

800 Euro for monthly insurance? And we complain about paying $108.00 per family. I know our taxes are heaven compared to most of Europe. It's difficult making tax comparison as things are not always what they seem at first glance. For instance Americans do get to deduct their mortgage interest, but only the amount in excess of their basic deduction anyhow. I think the basic deduction in the US is $3800? So you choose to take the standard deduction OR to itemize (mortgage interest, charitable donations, ect..)