‘Save your Confederate money, boys. The south will rise again.’ You may recall the lyrics about ‘Confederate’ dollars. They never did rise again. But the Yankee dollar? That’s another story. We in the Great White North are going to find travel south this year much more expensive. Snowbird and ValueTrend (www.valuetrend.ca) portfolio manager Keith Richards tells what he’s doing to prepare.
I’m sure that at least a few readers of The MoneyLetter travel south to escape the harsh Canadian winter. For the past few years, the challenge to these folks has been the declining loonie. In fact, in 2011 the Canadian dollar (CAD), or loonie, traded at $1.06—which was a 6 per cent premium over the US dollar (USD). This, along with the lower southern property prices at the time, provided Canadians with a unique opportunity to buy properties ‘on the cheap’ in their favourite US winter havens.
My how things changed. US property prices in the south have increased dramatically since 2011. Meanwhile, the CAD had dropped from that 6 per cent premium versus the USD to a low point of $0.69 by January of this year. That $ 0.37 change made things get mighty expensive for Canadian snowbirds who spend a considerable amount of time and money down south.
Alas—some relief came for the falling loonie when the combination of a rally in oil prices and growing confidence in the Canadian economy inspired the Bank of Canada (BoC) to start raising rates. This pushed the loonie back up to a peak of around $0.83 in late September of this year. Further help for the loonie came from downward pressure on the USD from an overbought position, and from a declining level of confidence in the US president.
I’ve been tracking the loonie for some time. The big CAD trend has been down since 2011. I noted in my blog (www.valuetrend.ca) quite some time ago that I had an initial target of 0.80-0.81, with a maximum upside of 0.84 for the loonie. That is pretty much what we got, with the loonie reaching a high of $0.83 in September. Since then, as predicted, the loonie has been moving back into its longer-term dominant downtrend. My current targets for the CAD are a first stop at $0.78 and possibly into the mid $0.70s. A revival of the loonie will depend on the strength of the Canadian economy.
Another useful chart for the loonie is published by equityclock.com. This chart shows you, on a percentage basis, the performance of the CAD relative to the USD each month. Note on this chart that even in non-rate-rising years, there are seasonal trends to drive the loonie higher through the summer. The peak often occurs in late September—which occurred right on schedule this year!
The seasonal pattern suggests a bit of chop through the fall into winter before the seasonal decline for the loonie begins in November. While nothing is precise (seasonal patterns are a tendency, not an absolute), snowbirds may still want to consider that the typical seasonal patterns are for a weakening loonie over the winter. Thus, snowbirds or those converting into USDs may have a short window, to the end of November, to convert their loonies to USDs, should those seasonal tendencies play out.
Some of you may be looking to convert some loonies into USDs on its recent strength even if you are not a snowbird. Perhaps you are looking at a major purchase in the US, such as real estate, or a big buy of US stocks. I’m in that situation. I recently converted a significant chunk of CADs into USDs for the building of a US property.
Will the loonie extend its rally? Not just yet, in my opinion. Beyond the strong technical factors noted above, we still have oil near $50 (versus $90 just a few years ago), and we have rising debt in Canada thanks to a spend-happy government. True, we are seeing growth, but there are other pressures such as:
■ wildfires in BC that will eventually affect the broad economy;
■ ongoing trade talks with the US that may result in some unfavourable policies;
■ higher capital gains taxes on savers/ investors; and
■ arguable business tax and wage policies potentially to be implemented.
We will be hard pressed to see growth in Canada ramping up much more. If there is no growth, the BoC can raise rates only so much. Meanwhile, there is only so far the USD can fall.
Moreover, if the proverbial poop hits the fan in the East (North Korea), it’s likely that the USD and Euro will be the go-to currencies—not the loonie! So there are many risks that might slow the upside beyond a few more pennies on the loonie. For this reason, I continue to invest in USD-denominated stocks, and remain biased towards converting and holding USDs now, rather than later.
I do hope that some of you in a similar situation as mine have begun your currency conversion by the time you read this article. It is my opinion that the USD will continue to outperform the loonie for the coming year or years.
Keith Richards, Portfolio Manager, can be contacted at firstname.lastname@example.org. He may hold positions in the securities mentioned. Worldsource Securities Inc., sponsoring investment dealer of Keith Richards and member of the Canadian Investor Protection Fund and of the Investment Industry Regulatory Organization of Canada. The information provided is general in nature and does not represent investment advice. It is subject to change without notice and is based on the perspectives and opinions of the writer only and not necessarily those of Worldsource Securities Inc. It may also contain projections or other “forward-looking statements.” There is significant risk that forward looking statements will not prove to be accurate and actual results, performance, or achievements could differ materially from any future results, performance, or achievements that may be expressed or implied by such forward-looking statements and you will not unduly rely on such forward-looking statements. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please consult an appropriate professional regarding your particular circumstances.
This is an edited version of an article that was originally published for subscribers in the November 2017/First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.
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