Sunday, April 3, 2011

The Loonie: A new safe haven currency

by Michael Arbow MBA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

The past few weeks have been filled with world altering events and uncertainty and the end story for those in Japan, much of the Middle East and the Euro-zone has yet to be written. With uncertainty, the appreciation in the price of gold has happened and is expected but what is not expected is an unwavering Canadian dollar (CAD). In terms of world currencies, when the going gets tough, generally, the tough go the US dollar (USD). However since February 1st the CAD has traded above par to the USD and that is with long Canadian government interest rates at 80 basis points below comparable US debt and 7 bps below German debt (each holding AAA debt ratings). 

To me this suggests that the CAD is becoming a safe haven currency.  This move is substantiated by double digit immigration and high levels of international capital inflows both of which demonstrate that Canada is globally the preferred place to live and invest.  This new disconnect – that is the Canadian (resource based?) currency as a safe haven, is something to be proud of for Canadians but it will and can cause problems for our exporters. 

Bank of Canada Governor Mark Carney stated last week that the world is in a multi-decade commodity boom.  The effect of this according to economist Patricia Croft and David Rosenberg is that over the next 3-5 years a $1.20 USD/CAD exchange rate could prevail. To me, the trend has become fact.  For Canadian exporters and those investing in the United States, what steps is your organization taking to ease the potential pain?   

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