InvestingDaily.com

Account Information

  • My Account

    Manage all your subscriptions, update your address, email preferences and change your password.

  • Help Center

    Get answers to common service questions, ask the analyst or contact our customer service department.

  • My Stock Talk Profile

    Update your stock talk name and/or picture.



Close
FEATURED STRATEGY

How To Collect Your Share of My Million Dollar Giveaway

How To Collect Your Share of My Million Dollar GiveawayWe recently kicked off the most outrageous initiative in the history of investment research. It’s called the Income Millionaire Project. And the goal is simple: create 1,000 income millionaires. That’s a $1 billion goal! No one has ever tried it before, but that doesn’t bother me. I’m so sure you can use this program to make a million bucks… I’ll pay you $1,000 to start your journey. Go here for details.

 

The Loonie’s Forced March

By Ari Charney on February 5, 2016

The Canadian dollar didn’t always march in lockstep with the price of oil. Historically, in fact, the loonie’s movement has been largely independent of crude prices.

But the global commodities super cycle, which began early last decade and began unwinding over the past three years, changed all that.

The currencies of resource-rich countries such as Canada were seen as implicitly backed by hard assets, a concept that held great appeal in a post-2000 world where paper values have repeatedly proved ephemeral.

Of course, just like any other asset, resources go through their own dramatic boom-and-bust cycle. The boom phase pushed the Canadian dollar above parity with the greenback, briefly confounding Americans who were accustomed to ridiculing the looney as nothing more than Monopoly money.

But even during the energy boom, the loonie only loosely tracked the price of oil. More recently, however, as crude’s crash deepened, their movements tightened considerably, especially during the fourth quarter, and particularly during January.

A little more than two weeks ago, both the Canadian dollar and North American benchmark West Texas Intermediate crude (WTI) hit their lowest levels since 2003.

Then, finally, we got some relief.

A Geopolitical Intervention

First, Russia made a characteristically cynical play by announcing the possibility of a rapprochement with OPEC, particularly Saudi Arabia. The Russians floated the idea of negotiating an agreement with OPEC to cut production. And even if nothing comes of it, the beleaguered Russian economy gets a short-term boost from the sudden jump in oil prices off their recent low.

In terms of global crude oil production, OPEC holds a market share of more than 40%, with Saudi Arabia, OPEC’s biggest producer, accounting for about 13% of the global market. Russia, which is one of the biggest non-OPEC producers, holds a market share of around 13% as well.

But Russia has made similar overtures during past oil crashes, and then failed to cut production even after OPEC finally acquiesced. So there’s not a lot of trust to go around.

Meanwhile, Russia and Saudi Arabia, the nation that wields the most power in the oil-producing cartel, are both on opposite sides of the conflict in Syria, making it even more unlikely that the two countries would reach an accord.

Even so, the mere notion of possible production cuts has been enough to trigger a 20% rebound in the price of WTI, to $31.72 per barrel as of Thursday’s close.

Exchange rates don’t generally move with the same magnitude as volatile commodities prices, but the loonie’s ascent since its January low, at US$0.6859, has been equally noteworthy. It recently traded at US$0.7273, helped even further by a sudden decline in the U.S. dollar, owing to diminished expectations for further rate hikes this year by the U.S. Federal Reserve.

Still Under Pressure

But it’s probably too soon to relax. The energy markets are likely to remain volatile, which will put pressure on the loonie again.

Meanwhile, the Bank of Canada is widely expected to cut its benchmark overnight rate by another quarter-point later this year, possibly as soon as late May. The central bank cut rates twice last year, and the overnight rate now stands at 0.50%. Another rate cut would also put pressure on the Canadian dollar.

So while we’re likely near a long-term bottom for the looney, we probably haven’t seen it quite just yet.

Indeed, a Reuters poll of 45 currency strategists shows that the currency is expected to head toward US$0.70 again in the months ahead. And given the market’s penchant for drama, it could very well dip even lower than that.

As one of RBC’s leading currency strategists told the wire service, “Everything is taking cues from crude prices, and nothing more strongly so than the Canadian dollar.”

Among those surveyed, the most bearish forecast was US$0.645, which is below the recent low, but not quite as bad as Macquarie’s prediction that the currency could sink to US$0.59.

Two Ways to Play a Lower Loonie

For those new to Canada’s investment story and who have a three- to five-year time horizon, these considerations may seem academic.

After all, it’s exceedingly difficult to call the bottom in any asset, and if we’re just 5% to 10% away from the loonie’s ultimate low, then now may be as good a time as any to start building a position in dividend-paying Canadian stocks.

And for income investors who like the possibility of a growth kicker, the lower exchange rate could create some nice windfall opportunities as U.S. companies look to acquire Canadian firms on the cheap.

The latest example of this trend happened earlier this week when U.S.-based Lowes scooped up Canadian home-improvement retailer Rona for US$2.3 billion, which is equivalent to C$3.2 billion.

So there are two ways for U.S. investors to play a low loonie, and they’re not mutually exclusive: Lock in long-term value at a nearly 30% discount to the U.S. dollar, while selecting the sort of fundamentally superior firms that might be attractive to foreign acquirers. Our Dividend Champions certainly fit the bill.


You might also enjoy…

 

Boost Your Annual Income By As Much As $12,036

We’ve uncovered a unique income-boosting opportunity that allows you to collect up to $1,003 a month in extra government cash. 

This plan is available to everyone over the age of 18.

The amount you make isn’t dependent upon your marital status…

How much money you currently make…

Or even how much money you made in the past.

Best of all, because of the way Uncle Sam views the money that comes from this plan, your current—or future—Social Security benefits won’t be affected, either. 

There’s still time to get your name on the list for the next check run. 

I’ll show you how here.

Stock Talk — Post a comment Comment Guidelines

Our Stock Talk section is reserved for productive dialogue pertaining to the content and portfolio recommendations of this service. We reserve the right to remove any comments we feel do not benefit other readers. If you have a general investment comment not related to this article, please post to our Stock Talk page. If you have a personal question about your subscription or need technical help, please contact our customer service team. And if you have any success stories to share with our analysts, they’re always happy to hear them. Note that we may use your kind words in our promotional materials. Thank you.

You must be logged in to post to Stock Talk OR create an account.

Create a new Investing Daily account

  • - OR -

* Investing Daily will use any information you provide in a manner consistent with our Privacy Policy. Your email address is used for account verification and will remain private.