Profit from a loonie likely to keep lagging the greenback

Sometimes things just go on and on and on. Take, for example, the loonie’s duel with the greenback.

So observes Keith Richards, Barrie, Ontario-based portfolio manager of Value Trend/Wealth Management, who forecasts the continued lagging of the Canadian loonie behind the U.S. greenback. Mr. Richards expressed his views recently in Investor’s Digest of Canada:

It is remarkable how the applicable support line, which you can see on my blog, (www.smartbounce.ca), held until late last year. But it’s also remarkable how this line is now the resistance level.

Yes, folks, sometimes this technical analysis stuff really works!

If you’ve followed my work for any length of time, you’ll know that when forecasting, I try not to make too many assumptions.

So, if you were to ask me what target the loonie will hit next, I’d have to say our dollar looks as if it will face a high hurdle at its new resistance point of US$0.945.

That ceiling, if broken, will potentially position the loonie for a big upside! But as I said, I’ll make no bets right now.

It’s better to wait until the dollar breaks US$0.945 before you get too bullish or too bearish on the U.S. exchange rate. And this breakthrough has yet to occur.

When we step back from the greenback-loonie duel to see how it’s faring against the Yen, the Euro, or whatever, some interesting patterns emerge.

For example, when measured against a basket of world currencies, the U.S. dollar has remained range-bound since 2012 — especially since the beginning of 2014.

So despite the big movements the loonie has made against the greenback, its movements against other currencies have been much less volatile.

Greenback likely to win

So, despite all the excitement over our dollar’s recent rise during the early part of this summer, the loonie has been selling off since hitting US$0.945. It would appear the greenback might have the upper hand — at least over the next few months or so.

As a result, I wouldn’t hesitate to recommend that you now hold some of your assets in U.S. dollars.

In fact, unless the loonie cracks US$0.945, you shouldn’t be too concerned about seeing it get up to par with the greenback.

Given the length of time the US$0.945 support level — now its resistance level — held up, a return to par may be a long way off!

To play the greenback against the loonie, consider an exchange-traded fund like Horizons U.S. Dollar Currency (DLR-TSX).

Although the fund benefits from a rising greenback, it nevertheless trades on the TSX — and in Canadian dollars.

Moreover, such an ETF may be an easier security with which to trade currency movements than buying futures contracts.

To take advantage of the strong greenback, you might also boost your holdings of those stocks and fixed-income securities that are denominated in U.S. dollars.

For example, here at Value Trend, we still have a reasonable exposure to the high yield bond market in the U.S. via the Horizons Active High Yield Bond ETF (HYI-TSX).

U.S. exposure remains

Managed by Montreal-based Fiera Capital, the fund now yields roughly 5.8 per cent, while offering potential upside to a growing U.S. economy, as well as exposure to the U.S. dollar through a TSX listing.

We also continue to like the market for U.S. preferred shares. Although many ETFs for U.S. preferreds are now available, we’ve singled out iShares U.S. Preferred Stock ETF (PFF-NYSE).

Not only does its 6.6 per cent yield and strong chart suggest further upside, they also suggest the potential for capital gains.

Keep in mind that the U.S. stock market is still the biggest in the world, boasting some of the highest quality names now available.

Two good U.S. bets I’ve singled out in previous columns and whose shares we’ve bought for our portfolios include Microsoft Corp. (MSFT-NASDAQ) and insurance giant American International Group Inc. (AIG-NYSE).

And although AIG took it on the chin during the market meltdown of 2008, it remains a force to be reckoned with, boasting 88 million customers in 130 countries.

Not only does AIG serve 98 per cent of the Fortune 500 companies, it serves 96 per cent of the Fortune 100 names, as well as 90 per cent of the Fortune Global 500.

Ranked the 40th biggest insurance outfit in 2014, AIG also insures 40 per cent of Forbes’ 400 richest Americans.

Yet another U.S. stock we continue to like is The Walt Disney Co. (DIS-NYSE). Hardly a Mickey-Mouse outfit, Disney is an entertainment behemoth whose 14 theme parks girdle the globe.

In addition to its movie studios, which were the basis for the company’s growth, Disney also owns the ABC television network, as well as cable TV channels such as ESPN, A+E and the Disney channel itself.

More important, the company continues to make piles of money, having posted third-quarter earnings of US$2.2 billion, or $1.28 a share — a 22.2 per cent increase year over year.

Sales were also higher, jumping eight per cent to US$12.5 billion, while segment operating income rose 15 per cent to US$3.9 billion.

For the nine months ended June 30, Disney also did well, notching net income of US$6 billion, or $3.40 a share — an increase of 27 per cent over last year.

Sales also presented a brighter picture, rising nine per cent to US$36.4 billion, while segment operating income zoomed 24 per cent to US$10.2 billion.

One other U.S. stock you should consider buying is Texas Instruments Inc. (TXN-NYSE).

To sum up, adding some U.S. dollar exposure can diversify your portfolio, as well as give you capital appreciation, should the loonie fall against the greenback.

 

 

Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846