RE:RE:RE:someone is finally buying Canadian Dollar vs U.S. Dollar – impact on investment strategy
A relatively unnoticed development during the current equity bull market, which began on March 23, 2020, is the strength of the Canadian dollar, which has risen from 69 cents to 80 cents (16 per cent) against the U.S. dollar.
Since March 2020, the U.S. dollar has weakened against all major world currencies as foreigners have become net sellers of U.S. treasuries on fears of U.S. dollar weakness amid an ever-expanding U.S. debt load and enormous Fed liquidity while enhanced risk appetites have lessened its desirability as a ‘safe haven’ currency. During that time, the Canadian dollar has strengthened against most world currencies (the Australian dollar being the notable exception). The loonie is benefiting from commodity price strength, particularly for oil, and the Bank of Canada’s quick recognition of emerging inflationary pressures, causing it to be more hawkish that the U.S. Federal Reserve.
Over longer cycles, relative currency strength between the Canadian and U.S. dollars is quite well correlated with relative stock market performance. In periods of strong U.S. stock performance compared to Canada, the U.S. dollar has risen relative to the Canadian dollar and vice-versa. So, identifying the more attractive stock market can also benefit investors in terms of currency appreciation.
Over the last year we have seen better opportunities for new investments in Canada than we have seen in the U.S., increasing the Canadian bias in our portfolios, and having the added benefit of lower exposure to U.S.-dollar denominated names as the USD has weakened. With better relative valuations and the potential to benefit from improving fundamentals, Canadian stocks may be about to reverse their decade-long underperformance relative to U.S. stocks (the Canadian market is outperforming in 2021). We recommend a continued bias towards Canadian stocks compared to their U.S. counterparts.