Wednesday, 26 March 2014

Canadian dollar lower for a many reasons

The Canadian dollar is at a five year low and economists are predicting this isn't the bottom. TD Bank says it could fall as low as 85 cent while RBC is more optimistic saying 87 cents. All of this has Canadians wondering what this means for our economy and how a dollar that was at par only a year ago could fall so far, so fast. Some are calling the Lonnie’s slide a perfect storm of events, with a number of key announcements coming out at the same time that all pushed the dollar lower. 
Here’s what's behind it.

Comments from the Bank of Canada
Early last week, Bank of Canada Governor Stephen Poloz announced he expects rates to remain low for the longer term and said he could not rule out a rate cut if the economy needed it. This is a starkly differently message to what Canadians have been hearing. We have been told since 2008 that Canada’s economy is strong and we are waiting for the rest of the world to catch up before we can raise rates. The new message from Canada’s top banker lead to investors dumping the dollar sending it two cents lower.  Now many traders are shorting the Loonie is the anticipation that it will slide lower.

Comment from the U.S. Federal Reserve
Meanwhile, the U.S Federal Reserve's newly minted Chairwoman Janet Yellen,  announced the opposite last week that it may be raising interest rates in the near term and that it would move faster to reduce its monetary stimulus. The bond buyback program has helped the U.S. economy regain its strength after the banking crisis that crippled many businesses. If the economy no longer needs stimulating it means it’s strong enough to hold its own, and that is good news for the U.S and its Greenback. As a consequence, a stronger U.S. dollar has put downward pressure on our Loonie

Good U.S. economic news
The Fed’s announcement comes on the heels of a slew of good economic data in the U.S. The four week average of Jobless claims is down, so more Americans are working. Business activity is also up according to the U.S. Conference Boards leading indicators. As well this week, data is showing U.S housing prices are rising  and consumer confidence is at a six year high. This has caused a flood of investments dollars to come out of Canadian's bonds and flood to the U.S. 

What does a lower Loonie mean for your pocket? 
A higher dollar was hurting our economy that relies so heavily on trade, especially with the U.S., where 75 per cent of our good and services go too. A lower Loonie will give our manufacturing sector a much needed boost. Also , with the U.S. economy showing increasing momentum Canadian businesses will benefit. Better business and consumer confidence in the U.S. is an all good news story for Canadian businesses. But as consumers we should prepare for higher oil and gas prices as well as paying more for groceries, especially on produce that comes form the U.S. All of these are priced in American Dollars and will inevitably become more expensive. 

How can we invest?

For Canadians who want to make some money while the dollar falls they may want to consider exchanging their CAD to USD. If the Loonie falls further you would be able to buy back more Canadians dollar with the same amount of U.S. dollars. Also talk to you financial adviser about companies based in the U.S. that you could invest in to profit of the resurgence in the U.S economy. But mainly as a personal finances expert I always say that your investment horizon should be long term so 15-20 years. By keeping a long term perspective you tend to pick better quality investments.  Don’t be afraid of a lower Loonie, embrace it because this is where our dollar should be for normal economic conditions to exist. 

2 comments:

  1. Heard the CBC interview this morning. Encouraging people to become currency speculators is clearly not a good idea. The most useful comment was about classic investment advice being to ignore all the short-term stuff bandied about by the financial press, and stick to the long-term investment knitting. And that contradicted much of the remainder of the interview.

    Far too many folks are attracted to the sirens of the Business Channel. Too bad, when basic financial literacy is lacking in a widespread fashion.

    Regards... Tony Pasternak
    Calgary

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    1. Hey Tony, Thanks for your comment. I would never ask anyone to be a currency speculator. My main point was THAT kind of investment doesn't make you a lot of money - EVER. Long term, conservative investments are always the best bet.I always say don't let the every day business news headline sway your investment decisions.

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