A Loonie beats an Eagle?
Parity Between US Buck and Loonie?
That is what the CIBC and their analyst Zafar Bhatti thinks. Same reasons as previous Loonie flights but still worth noting:
- Commodity prices, and Canada being the Northern Resource Kingdom to the U.S. (and a lot of the world)
- Potential for higher interest rates in Canada, thus strengthening the dollar (remember targets are June)
- Canada is a good investment in terms of our credit balance. Yes our Government is in debt, but nothing like the Americans, and most of our debt is held by Canadians themselves (i.e. Savings Bonds), so we are a good risk (maybe we can get a Amex Platinum for Nations?)
An excellent quote from the CIBC is:
…This puts the Bank of Canada between a rock and a hard place, if they signal rates are going to rise, the Canadian dollar will make a run for parity or stronger…
A blip over the summer with a subsiding in the fall might be a good thing for Canadian consumers, maybe.
Big Deal!
Well, actually it can be a very big deal if the Canadian dollar gets really strong, it will cause Canadian products to be too expensive for your Yankee cousins (whether the Canadian dollar strengthens against the Chinese currency and the Euro remains to be seen). Many, many small Canadian firms rely on trade with the U.S. and a soaring Loonie will cause that market to dry up, unless the manufacturers slash prices in reaction to this rise.
Reverse cross border shopping will start again. Many things are cheaper in the U.S. if you simply look at the price tag, and if the Canadian Dollar can buy the same as a U.S. dollar, why shop in Canada? For someone in Ottawa you are 55 minutes from Ogdensburg, and not that far from other U.S. towns and cities that will see an influx of “Frost Back” Canadians with their Beaver Bucks in hand. This will help these border towns a great deal, but will have the reverse effect on Canadian border towns.
Is this a permanent thing? I have no bloody idea, but I am now looking at US Index funds (and ETF’s) thinking that if the Canadian dollar goes any higher am I getting a bargain? As is pointed out in the CIBC report, if American Inflation explodes (say because their Government is printing money as fast as they can spend it) and the U.S. Central Bank has to raise interest rates, then this will simply be a “bulge” which will subside quickly and the Canadian Dollar may slide back to where it has been (of course if Canadian Inflation explodes in reaction to American Inflation, the two factors may cancel each other out).
I would encourage you to read over this very interesting report and form your own ideas and opinions about where we are going from here (economically).
Don’t we live in interesting times?
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March 13th, 2010 at 1:06 PM
I’m keeping a close eye on the loonie. If it hits parity or beyond, I’m hoping to buy into a few U.S. equity plays. Stocks such as JNJ, PG, and KO are attractive!
Nice post.