Consider the Canadian Dollar as a Possible Inflation Hedge

Given the historic monetary and fiscal moves of the Fed and central bankers everywhere, your local high dividend stock advisor should be familiar with foreign exchange markets and what moves them. Fortunately, good reader, you’re in luck.

If the worst of the declines in economic growth, energy and other commodities prices are over, then the Canadian dollar (aka the Loonie) should appreciate against the USD and other currencies.

The U.S. has committed to close to $13 trillion of “quantitative easing” (aka printing new dollars), a sum equal to the value of everything the U.S. currently produces in a given year. Add to this, the additional $1 trillion the G-20 has pledged to the IMF for needy nations. Perhaps a bit of that $13 trillion is already part of that IMF spending, perhaps not.

What's another trillion here or there?

If this policy does in fact improve the world’s economy and hiring and consumption pick up, there will be a lot of paper money that people want to spend on all kinds of stuff, virtually all of which will be for things that ultimately require energy and/or basic commodities.

Moreover, as any economics 101 student knows, the multiplier effect causes one dollar injected into the economy to feel more like $5, so that $13 trillion could feel more like $60 trillion plus. Maybe more, maybe less. With so much new paper fiat money floating around, we’re in new territory.

History shows that massive growth in money supply at some point leads to inflation. It’s just a matter of how much and when. A long, severe recession can keep the lid on inflation, but at some point things turn around, hiring and spending increase, and lots of currency chases a diminished supply of goods, causing inflation

Higher inflation means higher prices for hard assets like energy and other commodities. Indeed, these are among the first to rise, because they’re needed to produce and deliver finished goods.

The Loonie is a commodity based currency, so stronger commodity prices mean a stronger Loonie.

Adding to the CAD’s strength relative to the USD and other currencies is the relative health of the Canadian financial system, in which credit is available and there is no major money printing or spending for bailouts and credit easing. Well, nothing on the scale of what’s being done south of the border.

While no one knows when the CAD will recover against the USD, note how the recent uptrend/appreciation of the USD vs. the CAD, as defined by the series of higher lows, has begun to break down over the past three weeks, beginning the week of 3/15. Do the past three weeks signal a new trend? It’s unclear, but worth watching. Unlike many traders who focus on very short term movements, I like to step back and look at longer term charts in order to at least attempt to divine longer term trends. After all, we income investors tend to have long holding periods

[click to enlarge]

Comments

[Cliff Wachtel:]

To all my readers,

Dear readers, In humble appreciation of your support and comments, I attempt to entertain as well as enlighten. The original title of this article was (check the instablog) :GO LOONIE! A FOREX TRADER’S MUST-KNOW ADVICE FOR HIGH-DIVIDEND INVESTORS

However, the SA editors apparently felt otherwise, and toned down the title to the above rather soporific title, which should not be read while operating heavy machinery. And they say we accountants are dull.

Apr 06 05:03 PM

[E Nuff Sed:]

I agree with author. For even more protection buy the Canadian or Australian index - not only will you get currency inflation protection but also the protection of the resource based economy (as well as a decent dividend).

Apr 06 10:09 PM

[DuffBeer:]

Cliff , we need more bean counters like you !!! Hey I bet youe desk is cover with #2 penciles with missing erasers and those little hand held pencile sharpeners. I also question your photo with a suit and tie.
I bet SA doctored that too. I bet you had a bow tie ,sweater vest, sun visor hat and the famous Pocket protector.
Mr Teleprompter man's spending is driving all of us Loonie. Maybe parking some of the coins we will have "left" in an OH Canada
etf might be wise.
I just hope I can still afford my joe six pak beer.
Cheers DuffBeer

Apr 07 10:14 AM

[JCCIII:]

E Nuff Sed. By Canadian or Australian index, do you mean the ETFs EWC and EWA? If not those ETFs, what investible products are you referring to? Thanks.

Apr 07 03:33 PM

[Fabien Hug:]

For Australia buy IAF, yields above 10% and covers the whole Australian market.
I am long IAF.


On Apr 07 03:33 PM JCCIII wrote:

> E Nuff Sed. By Canadian or Australian index, do you mean the ETFs
> EWC and EWA? If not those ETFs, what investible products are you
> referring to? Thanks.

Apr 07 07:48 PM

[Bull Run:]

Cliff; Good advice, I also think CDN will appreciate against the US dollar into the low 90 cent range, maybe not as high as $1.20.It's the Chinese Yuan that is the dark horse.NO economy as large as China's can keep their currency pegged as low as it is, and NOT allow it to be traded internationally on capital accounts. How long will that continue?

Apr 09 05:00 PM