CAD vs. the USD

Benj Gallander and Ben Stadelmann
Monday October 5, 2015

Benj and family had the good fortune when in Prince Edward Island this summer to stay at the beach house of up-and-coming director Audrey Cummings, who gained renown with her feature film Berkshire County.

The movie won numerous awards despite being filmed on a ridiculously low budget of $125,000. That caught the eye of some big shots and she was signed to do two Hollywood productions. It would not surprise if some, if not all of the filming is done in Canada as the plunge in the Canadian dollar has made this industry once again far more economical in this country. In fact, the trip was planned to enjoy the beauty and food of the Maritimes and also avoid the harsh reality of the sinking Canadian dollar.

While the current relationship between the Canadian and US dollar negatively impacts travelling to our southern neighbour, it has provided a wonderful benefit to financial returns.

Fortunately, Benj took advantage of this and steadily increased the percentage of the portfolio stateside over the last number of years when the dollars were around par and as the US dollar climbed. The American component rose to the highest level in its history at around 70 percent, which he mentioned numerous times on BNN.

While he would like to say this happened with tremendous foresight and he saw the rout of the loonie coming, it was not the case. Rather, he was not afraid of the US dollar declining, and he felt it was far more likely that it would stay about where it was or get stronger. Let us call it betting on probability.

In 2010, the currencies traded close to par, with the Canadian dollar finishing the year a smidgeon above. In 2012, they were pretty much dead even. Since then however, the greenback has powered ahead, with this year being of particular force. It closed 2014 at $1.16 to the Canadian dollar and today has bulled ahead to almost 1.33. That creates an enormous financial return for those vested in the American currency and it has significantly lifted our results. While that means more money being allotted to the tax man, such is the price of success.

Looking forward, where do we go from here?

In all likelihood, the US debt ceiling will need to be raised again this fall, and, if history is an indicator, there will be much machinating and threats from the Republicans possibly leading to a governmental shutdown. The mere menace of this should negatively impact the American dollar, but once the situation is resolved and the limit raised —as it must be from this vantage point – odds are the dollar will rebound somewhat. Hypothetically, if this scenario is correct and naturally there is no guarantee that it is, an agile currency speculator could make money short term. Nonetheless, that is not our game.

After this period, many feel that the Canadian dollar will continue to fall especially when US interest rates increase. While we agree this will likely come to pass, neither economy, American or Canadian, is rocking on all cylinders. As the United States constantly broaches the debt ceiling, it is akin to an individual who adds another credit card to the bloated wallet to stay afloat. It can work for awhile, but eventually either the ship must be put in order or the credit rating will be damaged leading to higher borrowing costs and perhaps the necessity of a major belt tightening.

In Canada, debt also continues its ascent, with the Conservative government adding almost $145 billion to Canada’s liability during their tenure. While recent claims of a surplus do not ring true in many headquarters, whether it be real or not, it is tiny and likely will not last. That should hinder the loonie. In addition, personal debt in Canada is at an all-time high. That will hurt when interest rates do increase and/or housing prices fall.

In addition to the debt dynamics of each country, one cannot ignore the positive correlation between the price of commodities, especially oil, and the Canadian dollar, or the negative correlation between the price of commodities and the US dollar. When commodities turn the loonie will likely rally versus the greenback.

Ultimately, from where Benj is sitting, forecasting and timing is difficult. But he is not afraid of the Canadian dollar longer term expecting that within five to 10 years it will likely be stronger than it is now. Given this scenario, he will gradually be looking to rebalance to the Canadian side of the portfolio.

Meanwhile, those who were fortunate enough to weigh their investments to the US side might think of converting money back to the Canadian dollar, although it still could be premature. Or instead of paying conversion charges, some of those American funds could be used to travel to the United States, Europe or a plethora of other lands as the greenback will currently take you much further. A vacation where the riches of gains can be reaped is a wonderful return on investment.