The C$ drop alters the investing landscape dramatically. The 25% plunge in the loonie since November, 2007 makes foreign diversification less appealing, exporters more attractive and inflationary pressures greater. How so?
First, diversifying into foreign markets is less appealing because the Canadian dollar has now lost a great deal of purchasing power and buys much less (hopefully you did your foreign diversification as 2007 came to an end). As well, the risk of incurring currency losses on foreign holdings has risen since the loonie has fallen back closer to the bottom of its historical range and is more likely to go up in years ahead. In short, it’s perhaps time to think about investing more in Canadian stocks.
Second, the drop in the Canadian dollar obviously benefits manufacturing and other non-resource exporters that have long suffered under the loonie’s rise over recent years. This sector of the Canadian economy perhaps deserves more attention, especially if the exporter has a lot of clients in recession-resistant sectors. An example might be SNC-Lavalin Group (SNC.TO), which takes on infrastructure projects for governments around the world.
Third, the drop in the loonie means the dampening effect of a strong currency is gone. Imported inflation will put pressure on the Canadian consumer price index to rise and that means the Bank of Canada will have less leeway to lower interest rates in response to recessionary conditions. Shares in Canadian companies selling mainly to the domestic market may reward investors less than companies selling more to foreign markets.