The Bank of Canada has an excellent site that can help investors understand what factors move the Canadian dollar. Canada represents about three per cent of the equity world and about five per cent of the bond world, so the majority of investment opportunity resides in foreign currencies. This leads me to discuss the biggest investment factor in portfolios: currency returns.
Since the world left the gold standard in 1971, the annual impact from currency movements has been in the 5-10 per cent range, depending on the country. I know, most investors do not consider this at all, but it’s at least as large as the average price change in assets (stocks and bonds).
So what makes a currency move? There are two trade accounts that govern the types of money flowing. What is known as the current account and the capital account. The current account factors in data like the difference between imports and exports of goods and services. This is known as the balance of trade. The capital account deals with longer-term investments like securities (stocks and bonds), but also long-term investment. For example, a foreign corporation building a manufacturing facility in Canada. It creates jobs and taxes here, but the profits tend to flow back to the company’s home country. With all of these types of transactions, there is a net amount of money flowing in or out of the country.
When a government runs a balance of payments deficit, there is more money flowing out and the currency will tend to weaken. Canada used to be a big supplier to the U.S. auto sector and our largest export remains energy products.
Our exporting competitiveness is a major factor. A weak currency makes our exports cheaper. In 2019, 22 per cent of Canadian exports were mineral fuels (oil and gas), and vehicles accounted for 13.8 per cent.
When U.S. President Donald Trump said he wants more jobs in the U.S. and that the nation’s existing trade deals are bad, this is bad news for Canada.
Canada is a big exporter of steel and aluminum too, but neither factor into the top 10 export categories. Incidentally, gold exports (about five per cent) are on the rise with the dollar value on the rise, if not the quantity.
Graphic courtesy of BankofCanada.ca
Over the past 20 years, we see that Canada has been less reliant on the U.S. economy for capital flows, but it will always remain the biggest contributor. The biggest increases are China, Europe and Mexico.
This leads to my call for the week: The recent strength in the Canadian dollar is not at all due to improving trade outlooks for Canada (beyond some price increases in commodities). It’s not at all due to an improving fiscal outlook or an improving business climate that would attract foreign investment.
We are past the best before date in the energy sector due to lack of government support for investment in our largest export sector and possible global peak demand. It has got caught up in the general reduction in “flight to safety” flows in the U.S. dollar. And that has occurred, in part, because the U.S. is doing so much worse in terms of battling COVID-19, looming election uncertainty, and the massive debasement of the dollar as the Fed’s balance sheet is expanding at lightning speed.
I see the Canadian dollar weakening back below 70 U.S. cents (1.4286) over the next year and therefore I would look to own those U.S. assets via ETFs without a currency hedge.
My overall economic outlook is not bullish. DLR is the Horizons’ U.S. dollar money market ETF that gives exposure to the greenback. If you are sitting in cash because you are worried about elections or market valuation risk, consider sitting in the U.S. dollar.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
