Minuk's Musings and the Loonie

Forget about the Mike Tyson fight last week …

 

 

because it is the Canadian Dollar that is really taking it on the chin.

 

 

What this means is that you now need $1.40 CAD to purchase $1 USD.

 

If you own US investments, like US stocks for example, this is great. However, if you’re traveling down south for the winter break, just about everything will cost you more.

 

Why is the Loonie so weak relative to the USD?

 

Just like everything else, it comes down to supply and demand.

 

The US economy is stronger than the Canadian economy and if you want to invest in US businesses, you need US Dollars. This increases the demand for US currency.

 

Furthermore, Canadian interest rates have been dropping more quickly than have US interest rates. Today, the CAD interest rate (overnight lending rate) is 3.75% while in the US it is 4.75%. A higher relative interest rate on US Dollars is attractive and again contributes to demand for USD over CAD.

 

Trump’s election win on Nov 5^th hasn’t helped the Canadian Dollar’s cause as tariffs (only a threat for now) could increase inflation which would keep US interest rates higher for longer.

 

I do wonder if we will again see the CAD on par with the USD like it was in 2007 and again in 2011. My gut feeling is that it won’t happen this decade.

 

I hope you have a wonderful weekend.

 

Rich

Investment Advisor