Tuesday , 16 April 2024

How Much Higher Can the Canadian "Loonie" Soar Before Its Economy Gets Singed?

So says Eric Schaefer in edited excerpts from his guest article* posted at http://advisorperspectives.com/ entitled A Look At Our Neighbor To The North.

Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), may have edited the article below to some degree for length and clarity – see Editor’s Note at the bottom of the page for details. This paragraph must be included in any article re-posting to avoid copyright infringement.

Schaefer goes on to say, in part:

Bond, equity and currency movements over the last decade in Canada reflect the extent of the oil (and timber, iron ore, nickel, gold, silver and wheat among other commodities Canada has in abundance) boom there.

Canada’s Boom in Equities

Over the last decade, Canadian share prices (measured by the MSCI Canada Index) rose 14.1% per annum in US dollar terms. In contrast, the corresponding MSCI country index for the United States rose by a less spectacular 7.1% per annum. In part, the spread reflects the dominance of energy and basic materials companies on the Toronto exchange.

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Canada’s Boom in Bonds

Canadian government debt has enjoyed a similar bull market. In the ten years ending October 2012, the Citigroup Canadian Government Bond Index advanced 10.6% per year measured in US dollars versus a 4.9% return for US Treasuries). There are a variety of reasons for this disparity. A key element is the Canadian fiscal picture. Along with Australia, Canada is one of the few developed, industrialized nations not confronting a fiscal crisis from rising government debt. Canadian federal government debt is approximately 33% of nominal gross domestic product (GDP). In comparison, US Treasury debt now exceeds 100% of US nominal GDP. In a world tiring of ongoing and unresolved debt crises, Canada merits only positive headlines in the financial press.

Canada’s Boom in the Appreciation of the “Loonie”

These factors explain the steady appreciation in the Canadian dollar (or, the “loonie” among currency traders) versus the US dollar. Ten years ago one US dollar bought 1.58 Canadian dollars; today, it only buys one Canadian dollar. This flip in the relative values of the two currencies is mirrored in cross-border shopping excursions. A soaring loonie has spurred Canadian day trippers to head south to the United States in search of bargains.

(click to enlarge)

The Costs of the Boom

Booms — and this one is no exception — are seldom without their costs….[As the Canadian dollar appreciates versus the U.S. dollar, and with the U.S. as] its largest trading partner, falling Canadian exports could well induce a secular decline in the Canadian manufacturing base. [A good example of the unattended costs of the oil (and, commodity) boom can be seen in the ongoing negotiations between GM and Chrysler and the Canadian Auto Workers (CAW) union illustrate. Without significant changes in shop floor practices and a re-structuring of wage scales, both auto makers are threatening to shift production from Ontario back to the United States. Between them, the three automakers (including Ford) employ more than 21,000 Canadian workers.

As the loonie soars, the inevitable question is: “How much higher before its economy is singed?”

* http://advisorperspectives.com/dshort/guest/AI-121121-Our-Neighbor-to-the-North.php

Editor’s Note: The above post may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.

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