The Anti-Dollar Rush to the C$
Has Been Amazing

By Ian McAvity
Ian McAvity's Deliberations

        The anti-Dollar rush to the C$ has been amazing in the past two months. For US investors buying the EWC, an ETF of an MSCI Canadian Index, the gains since the August low have been spectacular, up 30%, while for Canadians, the major TSE index shows a less impressive gain of about 10%. Tax tinkering by the Feds and royalty hikes on energy producers by Alberta got washed off the page by the soaring Loonie. The larger question is how sustainable the C$ rush will be, as all the US branch plants manufacturing in Ontario for export to the US are going to rapidly feel the pinch when competing against a similar plant in Ohio...As the US economy slows, Canadian layoffs and plant closures will magnify lost competitiveness.
       Deliberations, as an example, mostly sells at US$225 to a largely US audience. It's printed and mailed from Canada. That $225 used to translate into C$345 (when C$ was at US$0.65) to pay Canadian printing/postage etc. At $1.07, that revenue is down to C$210, while printing & postage have inexorably been climbing. Drop revenue per subscriber by 40% while production cost rose 20% over the past few years and you get the picture of a small exporter.
        That impact doesn't seem to show up yet in the national data, with the natural resource based exports enjoying high commodity prices. But automotive industry related branch plants that are major Ontario employers will be hit hard.

C$ & A$ versus US$

        The C$ rush has powered above the upper side of the illustrated trend channel of the last four years. The sharp momentum spike of the Vs 200 Day MA Ratio clip, above +15%, is a record for at least the past 40 years. There's no telling where such a sprint may stop, but I expect to see a retest of the mid-90's whenever the US$/Euro weakness finally precipitates the inevitable coordinated ECB move to squeeze the Dollar bears and cool off the Forex arena.
        A 24% C$ rise since February injects volatility not seen on our 40 year history chart. Traders increasingly call C$ a "petro-currency" despite the fact energy recently was only 19% of Canadian exports, while 28% of total Canadian GDP was exported to the USA. With many global commodities priced in US$, the long term impact on Canadian exporters will be challenging. Expect a rush of Canadian takeovers in the US to take advantage of the high C$. Even depressed Florida and Arizona real estate markets will attract a surge of Canadian snowbird buying.
        Editor's Note: Ian McAvity is editor of Ian McAvity's Deliberations on World Markets, P.O. Box 40097, Tucson, AZ 85717, 1 year, 18 issues, $225. Introductory Trial: 4 issues, $49.