Canadian-dollar-currency

The loonie has been a star performer recently, but in the longer term, that performance likely won’t continue.

Read: Where the loonie will land

That’s because of potential cracks in housing, fluctuating oil prices, gaining momentum for U.S. economic data and uncertainty about NAFTA, says Craig Basinger, CFA, in a Richardson GMP Market Ethos report. Further, “Expectations for U.S. tax reform [are] now very low, opening the door for a potential positive surprise” for the U.S. dollar, he says.

BMO senior economist Sal Guatieri agrees. “We suspect the Canuck buck will struggle to make further headway,” he says in a North American outlook report. “The best economic news is likely priced in, the current account deficit is near 3% of GDP […] and the Bank of Canada likely won’t ignore a further sharp appreciation. We see the loonie trading below 78 cents U.S. in the year ahead.”

Basinger puts the loonie a bit higher, at US$0.79 to US$0.80, and says he thus sees greater value in U.S. exposure. “We closed our currency hedge in the Redwood Core Income Equity Fund,” he says, explaining that last April the firm hedged one-quarter of the fund’s U.S. holdings from a currency perspective.

His reasoning: economic data are changing momentum, and the number of speculators who moved from shorting the loonie to being long appears overdone. “The Canadian dollar moved too far, too fast,” he says.

Read: When Canada’s rebound will lose steam

Comparing returns from the S&P and MSCI EAFE, he shows that, over the longer term of 20 years, local-currency returns and Canadian-dollar returns are very close for both indexes — only a few basis points’  difference, he says, which probably isn’t worth the trouble of hedging in the long term.

Another reason for Canadian investors to embrace the U.S. dollar is as a diversifier, says Basinger — yes, really.

That’s because, as a resource-rich country, Canadian markets do well when global growth is healthy, and, in such an environment, “your Canadian investments are thriving, but your U.S. holdings are a bit of a drag due to the currency,” he says. “Think of this as insurance.”

Further, if global growth slows or global markets experience a shock, the U.S. dollar is viewed as a safe haven. Thus, the U.S. dollar “is a good diversifier for Canadians, and generally we believe investors should be unhedged,” says Basinger.

Read the full Richardson GMP report and BMO report.

Also read:

What to buy and avoid in Canada

Originally published on Advisor.ca
Add a comment

Have your say on this topic! Comments are moderated and may be edited or removed by
site admin as per our Comment Policy. Thanks!