Thursday, August 06, 2009
Crazy for the Loonie—and Canada
The world’s greatest currency?
Not the yen, or the euro, or the renminbi. Sure as shootin' not the US dollar or the British pound.
Yep, it's the loonie, Canada's dollar with the ghostly-voiced diving bird on it. And not just at the moment, either. This is the currency I most want to own for the next decade.
Right now, all the currencies of global commodity producers are rallying. The Australian and New Zealand dollars, the Norwegian krone, and the Canadian loonie all hit 11-month highs against the greenback this week.
The belief that China has gone on a sustainable commodity-buying spree to support its economic recovery has caused commodity prices to soar—and so too have the stock markets and currencies of countries that have commodity-based economies.
At Wednesday’s close, the iShares MSCI Canada Index (NYSEArca: EWC) ETF was up 80% from its March 9th low (the Standard & Poor's 500 index rose 48% during that period), while the Canadian dollar has gained 21% against the US dollar. (EWC traded above $24 late Thursday—Editor.)
I'd put the loonie and Canadian stocks ahead of currencies and stocks of other commodity-based countries because Canada's commodity basket is the most diversified in the world. (Well, Brazil will give Canada a run for the money if the South Atlantic oil discoveries pan out.) Canada has Norway's oil, Australia's mines and farms, and New Zealand's timber and farms all in one package.
And Canada is better positioned in the interest rate cycle. High domestic interest rates—as long as they're not so high that they signal some major economic dysfunction—make a currency stronger. Canada's loonie is strong even though the Bank of Canada has set its target interest rates at just 0.25%, exactly where they are in the US.
That means there will be plenty of support for the loonie when the Bank of Canada—no sooner than the middle of 2010, it has said—starts raising rates again.
lso, the bank has repeatedly pledged to keep its hands off the currency unless its outlook on growth and inflation materially changes.
But finally, I prefer the loonie to the rest of the world's currencies—and certainly to the US dollar—because Canada’s accumulated national debt has been falling, not climbing, for most of the last decade.
After hitting a high near 80% of the country's GDP in 1995-2000, Canada's accumulated national government deficit has dropped pretty much every year until it stood at just 30% of GDP in 2008. In comparison, the US ended 2008 with an accumulated federal debt of about 70% of GDP, and it’s projected to head higher.