Buying CurrencyShares Canadian Dollar ETF as Loonie Falls Below Dollar

CurrencyShares Canadian Dollar Trust (FXC) is a convenient vehicle (for those of us in the U.S.) for holding funds and collecting interest on them in Canadian dollars. It is far more convenient and less expensive (for reasonably small amounts) than the alternative of converting the funds, depositing them at a Canadian bank and then withdrawing and converting them back into U.S. dollars.

Yesterday was an interesting day in the markets as many commodities and related companies' stocks took a bigger tumble than the market as a whole. Canada is a resource rich country with many of the world's largest commodity companies calling it home. The selloff in this segment was in big part responsible for a lowering of demand in Canadian dollars, which pushed the Loonie's exchange rate back below U.S. dollar parity.

I saw this move as temporary and used the opportunity to diversify away from the falling (and perhaps failing) U.S. dollar, picking up FXC at $98.98/share.

Disclosure: Long FXC

Comments

[AmesTiedeman]

Jake, I agree completely that the move is temporary. One cannot have a trade deficit that is 5% of GDP and have a strong currency. I expect the Canadian Dollar to strengthen against the U.S. Dollar for years to come.

[algoa456]

Interesting - I am a Canadian who is betting the other way - estimates in Canada are that the 'natural' level is CDN$1 around $0.85

The US dollar fluctuates through a 10 to 15 year cycle. Extreme collapse scenarios aside for those outside the US starting to buy into US based ETFs with a 5+ year horizon could end very well.

[Jake Berzon]

Algoa, it was prudent for me to diversify some of my cash holdings into Loonies, now that the Loonies have corrected to a reasonable value range. Similarly, it is prudent for you to start buying into some US based ETFs. I bet, we will both be more right than wrong in the long term and that's really the name of the game.

[yetti123]

Jake, you have an interesting mind and I enjoy reading your comments, as you reveal more of your thinking processes. It was nice to change U.S. for Canadian at 1.59 as it was to buy gold at 289.,I cant think of one reason why the U.S. currency should strengthen against the Canadian Dollar except political ones. As happened with Canadian stocks when the loonie was weak, the same could occur with the U.S. market in the coming years, that is vast appreciation of U.S. assets, but it feels that is a long way off. Imagine the state of the U.S. economy, at present, with a strong dollar....maybe depression like conditions coupled with twenty-four hour printing of currency by the Mint. Anyway, I think that the dollar will depreciate further against the loonie before it begins its crawling rise?

[Jake Berzon]

My crystal ball tells me that under the right circumstances, i.e. additional lowering of interest rates, Obama winning presidential election, and etc. S&P 500 will finish the year in the positive territory, in which case 2009 will be disastrous.

In either case, price inflation will migrate from the wholesale level to the retail level on a much bigger scale. This will not translate into wage inflation, and the consumer will get squeezed 'till it really hurts.

This will cause a bigger than ever anticipated default rate by consumers on credit cards, which will cause a major market decline across the board (30%+ is quite possible). I think various actions by the Congress and the Fed could delay this past year end, but I do not think that anything that they do (perhaps, short of switching from a market economy to a planned economy) can avoid it in 2009.

But that's just my crystal ball...