Short the Loonie! - Barron's

After trading through parity with the U.S. dollar for the first time in 30 years, Barron's says it's time to short the Loonie ($Cdn). Economists often use purchasing-power parity [PPP] - a currency's ability to purchase a basket of goods - to gauge its value. On that basis, the loonie is worth a mere $0.81 U.S., though it currently trades at about $1.02 - a 26% overshoot.

Canada followed the Fed's lead in cutting interest rates in early December, and indicated more cuts may be in store, leading to a drop. Strong jobs and trade surplus data failed to boost the currency. "A currency that doesn't rally on good news is a good candidate to short," it says.

Its failure to decouple from the U.S., which still accounts for 75% of its exports and 25% of its GDP, make it vulnerable to U.S. weakness. Weak gains in worker productivity make the country increasingly uncompetitive.

Barron's says the loonie could be headed for $0.88-0.90 over the coming year. It suggests shorting CurrencyShares Canadian Dollar Trust (FXC), and reducing exposure to the country.

Comments

[GaryD:]

Hmmm... Canada has a balanced federal budget, a good trade balance, a declining national debt, a good current account balance, a fiscally responsible government, is a commodity-producing country, and has a currency that is increasingly being viewed as "hard money". The US is cutting rates in an inflationary environment. I think I'll pass on that short.

2007 Dec 30 11:42 AM

[CrossProfit_:]

GaryD,

Agree. Way too risky and against momentum. Would wait for the overshoot.

Based on 'basket of goods' gauge, what is the British pound worth? It pays for Brits to shop in U.S. just like Canadians...for that matter, the same is true for half of Europe. Barron's may have forgotten that the Brit situation has been this way since the mid 80's so you may have to wait 25 years for the basket theory to kick in!

CrossProfit

2007 Dec 30 12:10 PM

[erniem:]

I'll stay short the dollar thanks, and not short the currency of a vibrant economy with booming natural resources.

2007 Dec 30 03:03 PM

[bberrign:]

What a freaking crock...POS journalism at its worst. Mange la m@rde eh..

2007 Dec 30 10:30 PM

[Martin Lowe...:]

See my short ZAR call at www.lompie.blogspot.co...

2007 Dec 31 01:06 PM

[bill stenner:]

that has to be one of the most dangerous pieces of advice ive seen given!
The only way the Canadian dollar will sink is if a basket of commodities sinks. Canada is easily 1 year away from this at least. Tradition in the past in a recession is that Canada has followed behind the states in a time frame of a year. Oil, Coal, Gold, Wheat and other Grains would all have to suffer significantly to impact the Loonie. Jobs are robust in Western Canada while the manufacturing center suffers setbacks. That is due to poor government planning which allowed for putting all the manufacturing eggs into one political basket. We also have an excellent relationship with China and they will invest in Canada before the U.S. It is actually likely that we will see a massive spike in the Canadian dollar perhaps heading towards 1.20-30 because of the U.S. deterioration.
I do consider that 80% of our trade is with the U.S. and by far is our greatest trading partner. The fact of the matter is that if the U.S. is buying our resources as their dollar deteriorates this will only compound their troubles. I agree with the parity type numbers for now. My bet is that the Canadian dollar is being speculated upon by traders..before its last drop this was seen through postings that i believe are manipulating this fluctuation just as this article is. That is what really needs to be looked into. The Canadian dollar should not have swung so dramatically in the first place!

2007 Dec 31 04:15 PM

[Sr. Pessimist:]

That's what I heard from a guy working at a coffee shop. I think Canada's great, but I have to admit that Canada doesn't have a great self-sustaining economy. Just dependent on the US. Plus, my feeling is that Canada is a gigantic burp of the US. I was reading their policies on immigration and felt discontented by their recognition of America's medical industry, whereas one thing to be proud of in Canada is a nationalized health care system. It's a contradiction for a system to provide adequate health care to all citizens, but at the same time provide official recognition to the standards of the American medical system. Contradictions are fishy, and stand out like a sore thumb to me. So my migration concerns are directed toward Europe, provided that the capital systems show they can sustain the huge blow they are soon to suffer (due primarily to fault in their technological adaptations). If governments collapse quick enough, I might rather stick around America where everybody hates the government and would really be better off without it.

2007 Dec 31 06:23 PM

[JRM:]

I'm just having trouble shorting the loony based on PPP alone. I'm more of a technical trader however I dabble with fundamentals. I just can't see, over the next year or two, that the loonie will lose it's gains against the dollar. We're in a bull on commodities not only energy. Canada supplies both. More of the world is demanding the same amount of scarce resources. Simple economics. Now, Canada may desire to let their currency depreciate to help their export industries.... who knows. But you won't see me trying to catch a falling knife. If price action shows me a buying opportunity, sure thing boss. But blindly stepping in is suicide.

2008 Jan 03 02:51 AM

[Canadian:]

I work with many Americans and most of my customers are from the US and all congratulate me on our strong Cdn dollar. However, I would argue the bulk of the loonie's rise is due to a falling US dollar and not much Canada is doing.. The US is simply spending way too much, (its govt and its consumers), debt levels are way too high, and deficits with the rest of the world are too high. Allowing the US dollar to drop is one way to create the "soft" landing that is needed to avoid a recession. US interest rate cuts do not inspire the currency either. Since the US sub-prime financial crisis is only getting worse, I can see the US dollar tumbling another 10-15% or so (especially if the Fed plans more interest rate cuts in 2008 which is quite likely given politics of an election). While I agree the Canadian dollar was quite overvalued at $1.10 (but that was mainly due to speculators and people trying to prematurely "short" the looney), near-parity is reasonable at least for the next 1-2 years. Canada supplies a large amount of energy to the USA and has a lot of natural resources, gold, oil, forestry, metals, etc so unless commodities crash I can't see a Cdn dollar crashing. Now is the time for Canadians to invest heavily in the US... (which is already happening now... check out Boston's financial market.. Toronto Dominion and Manulife have sizable investments there. BTW I am shorting the Canadian TSX, but wouldn't short the Canadian dollar.. and trying to buy more quality beaten up US large caps that pay dividends. In 4-5 years we'll probably see the $0.81 that people that talked about for the correct PPP.

2008 Jan 03 11:02 AM