Skip to main content

Currency talk – the CAD in perspective



First, the CAD is a Petro Currency, it is most affected by the price of oil (and not coal) and for the past few weeks oil prices have dropped dramatically, due in part to the risks of recession (maybe) in the U.S. and of collapse (looking more likely) in Europe.  First, there is no doubt that the Euro is heavily overvalued, from the Big Mac Index all the way to PPP analysis they all scream to the fact that the Euro is just making Europe uncompetitive.  Proof is that the bulk of its trade in internal (this is a newish phenomenon).

So the CAD has lost about 6% of its value over the past 3 months – when oil price (WTI was flirting with the high $80s).  So far so good, but the AUD has fallen by 9% and the Brazilian real has loss nearly 1/5th of its value against the greenback.  So the CAD  has held its value rather well.

The CAD’s reality is that it behaves as a petro currency but in fact oil only accounts for a small percentage of its exports (I include gas here), in reality Canada is much more than that (especially for foreign investors who have been pumping money into Canada – to the tune of 8% of the GDP for the past 2 years – which is a lot).  The likelihood that the CAD will drop to the mid ‘80s against the USD are remote, although it could flirt with the low 90s over the next few weeks – a combination of reasons – investors seek the safety of the USD, so there may be some short term outflow out of the CAD (mostly in the form of Gov’t of Canada T-Bonds/bills).  This would not be the end the world; in fact it may push up short term rates. 

My view, and I’ve maintain this for some time, is that CAD could easily revisit the low 90s levels, nothing to do with Canadian activity, rather the risk of American slow down (and the high likelihood that Europe will do something stupid – rather via their inactivity European governments will cause the worse possible outcome).  However, the CAD will not stay low for long – because location conditions are just too compeling for investors:
  • An right of centre government looking to achieve balance budget b 2017
  • A general agreement on the right policy mix (the disagreements are at the margin)
  • Well educated labor force with limited wage differential
  • Medical costs that are nearly under control (and more than 10 health care systems)
  • Heavy investment in infrastructure (long overdue) across the country

I don’t want to address the China issue – frankly when Steven Roach says a “soft landing” in China is likely all bets are off (this guy was a bull stating that the Chinese growth would continue unabated until a few weeks ago – clearly something, on the ground in China, has changed!).

Over the medium term the Canadian reality is attractive to foreign investors, economy is well balanced, and while the housing market is on the expensive side national income is rising.

Comments

Post a Comment

Popular posts from this blog

Spray painting Taylor Swift G650 aircraft (updated)

 First, a bit of paint will not harm anyone.  These climate activities are going to learn two things in the next few days:  (1) Trespassing at an airport is a felony almost anywhere in the world.  That means criminal prosecution.   (2) removing paint from an aircraft is expensive.   So these climate activists are about to find out the reach of the British criminal system and it will not be pleasant, the UK has very strict laws about that, I would be surprised if cleaning the aircraft of all the paint will cost less than $100,000.     I am sure that when they planned (premeditation) this little show they had a very valid logic to doing this.  Tonight, they are probably realizing the depth of their troubles.   I understand that in the UK it's a minimum one-year jail sentence.    Also, good luck travelling with a criminal trespass charge against you.  I am relatively certain that the airline industry will ...
Post a Comment
Read more

Tariffs on inhabited Island

 Two seldom-visited islands, part of Australia, saw a massive increase in the tariffs they will face when exporting to the United States.   The 32,000 residents did not have much to say...being Penguines.   NO kidding, massive tariffs were imposed on Heard Island and McDonald Islands.  According to the Australian government, the last visitor to Heard was about a decade ago.   Never mind the 47% tariff on Madagascar, where the principal export is Vanilla and the GDP per capita is less than $500 a year. Not only a Stable Genus but evidently an administration that took all of two hours to proof the list of countries.    They also treated St Pierre & Miquelon, two islands part of France in the middle of the St Lawrence Gulf...
Post a Comment
Read more

Britain, France and Egypt

 The voters realize now that the Conservative Praty desire to return to 19th-century dominance has driven its hatred of the EU.  The voters realize now that departure from the EU has accelerated Britain's decline and may soon make it irrelevant.  At best it will have to kiss American arses to maintain its standing.  For this, the conservatives were punished.  The decline of Britain was inevitable, competition from Frankfurt and Germany in Finance was bound to grow.  The core of Europe (aka Germany) is aging quickly Macron seems to be winning his bet, the left alliance that won the legislative elections will not remain united for long, since they disagree on about everything.   The Far right though it was about to assume power is once again relegated to the back of the bus.   It may draw its own conclusions, but not all of these are good for France.  The far-right has won nearly 1/3rd of the electorate, that is not something to be ig...
Post a Comment
Read more