So the Canadian Dollar, or the Loonie, is at a five year low. Is it time to buy? The answer may be yes. Anything trading at a five year low should be looked at for its value proposition. The question always is, what type of catalyst will make the Loonie move higher? The answer for CAD is its neighbor to the south, the United States, which just reported blowout employment numbers.
It seems the American economic recovery is finally picking up steam. Even though over ninety-million people have permanently left the workforce, the official unemployment rate is well below six percent. The labor market seems to be tightening, albeit slowly. The lesson to be learned is that its very hard to hold back the American economy. It is deep and wide and resilient. In spite of several sucker punches thrown its way, it’s still slowly recovering. A sixty handle on the price of oil is also giving it a kick in the butt. The American consumer, having dollars put back in its wallet, will soon see an expansion in confidence. In short, Americans will start buying more things.
But hold on, isn’t this article about Canada? How does that affect the Loonie? Because Canada is an export economy, that’s why. And Canada is the United States biggest trading partner. Very soon, Americans will start buying more Canadian stuff.
The Loonie is currently weak against the Canadian Dollar because everyone expects the Federal Reserve Bank of the United States to start raising interest rates next year. Higher interest rates equals higher demand for a currency. The dollar is strong and will most likely get stronger in the near term as the rest of the world struggles to find economic growth.
However, Canada’s fortunes, to a large extent, rest on the success of their southern neighbor. How goes the economy of America, goes the economy of Canada. Yes, oil prices are low and that impacts Canada’s energy sector, which is no small part of Canada’s exports. However, a roaring America will negate most of this effect overall in my opinion. And at some point, Canada will have to raise rates. That is the tipping point; the point to buy the Loonie. Or, if you have a crystal ball, right before Canada raises rates. I personally like to buy when there is blood in the streets and when no one wants it – kind of when something is at a five year low.
Another facet to this argument is that Canada is starting to see a stop-and-go economic recovery as well. Jobs are being added and there are signs of an uptick in business investment and capital spending.
The bottom-line is that the recovery in North America is real. This will translate into higher demand for the American and Canadian currency as the respective central banks raise rates to combat future inflation. If you are looking for a double whammy on the upside, look at Canadian energy companies denominated in CAD. Twice the bang for the buck when the economic pendulum really starts swinging towards the green.
L.Todd Wood is a former emerging market debt trader with 18 years of Wall Street and international experience. He is also an author of historical fiction thriller novels. His first of several books, Currency, deals with the consequences of overwhelming sovereign debt. He is a contributor to Fox Business, Newsmax TV, and others. LToddWood.com