Canadian Dollar – An Underappreciated Currency, What It Might Say About US Stock Market

For several years now I have recommended adding short term Canadian Treasury notes to client portfolios, beginning when the Canadian dollar was roughly 62 cents to the US dollar.  The last of these positions mature in 2008, including those that already matured in July and another group set to mature in December.

Earlier this year the Canadian dollar peaked at 102 and today it sits at 82, implying a decline of 20 percent.  The Australian dollar has by comparison dropped more than 30 percent and the euro has declined 18 percent.  For quality foreign fixed income diversification I have prefered Canada with the notion that Australia is riding a commodity boom yet poorly manages its national finances and the euro is simply being sustained from new countries being added to the euro trading zone.

The question becomes, why the drop in the Canadian dollar when Canada is in a stellar financial postition compared to the US and what does this say about the US stock market.

Canada has consistently run budget surpluses and maintained a strong financial house.  This drop could indeed be rooted in investment funds cashing in these Canadian bonds in order to meet redemptions.  Since highly liquid they are easy to sell.

If indeed funds are selling a high quality sound government security like Canadian Treasuries, a country with much stronger financial footing than the United States, it would also seem apparent that the challenges facing banks and other globally diversified investors could be much greater than anticipated.  This could be particularly true of hedge and private equity funds given the likelihood that large parts of their portfolios are not liquid at the time being.  Current regulations do not require such funds to file reports with the SEC detailing their holdings and their current market values.