Argentine crisis affects loonie? Why?
“Argentine fallout hits dollar” screamed the Saturday headline in the ROB (Report on Business). The story went on to explain that last week’s precipitous fall in the loonie (almost three-quarters of a cent in three days versus the U.S. greenback) was triggered by anxious investors fleeing “to safer currency”.
Huh? Stop and think about that for a moment. Argentina has a financial crisis and the Canadian dollar plunges, along with a bunch of other “emerging market” currencies. Where exactly does that put us on the confidence scale? Nowhere, that’s where.
What possible relationship should there be between the Canadian dollar and fear of an Argentine debt default? We have one of the most stable governments on Earth, thanks in part to the self-destruction of the Canadian Alliance. Heck, the Liberals have about as much chance of being forced from office as the Communist regime in China after their winning Olympic bid.
We have a federal budget that is comfortably in surplus and we are paying down the national debt. Most of our provincial finances are in good shape. Separatism is a dead issue for now. Our economy is healthier in rative terms than that of the U.S. Our short-term interest rates are higher than those in the States, which should be an attraction to hot money. Our trade surplus is burgeoning. Our personal income taxes are coming down and household income is rising.
All this should be great news for the loonie. We should be pushing the US$0.70 figure, which is what economists keep telling us our dollar is worth. Instead, Argentina runs into financial difficulties and the loonie pays the price. Investors want a “safer currency”. What’s safer than Canada right now?
Let’s be blunt about this. “Safer currency” is simply a euphemism for U.S. dollars. It used to be that people rushed to buy gold in times of financial crisis anywhere in the world. Now they rush to buy greenbacks. Never mind that the U.S. dollar is seriously overvalued. Never mind that the U.S. is running a huge balance of payments deficit. Never mind that despite all of Alan Greenspan’s stimulation, the American economy is taking an infuriatingly long time to respond. It’s the only mega-power left and the only country in the world in which people seem to have blind confidence.
I have no idea how long this is going to continue, but I suspect it will be for some years. As long as it does, the Canadian dollar will be subject to this kind of volatility. Last week the loonie took a beating over Argentina. Can you imagine what would happen to it if Paul Martin were to announce that, because of the economic slowdown, the federal government was facing the prospect of either slipping back into deficit or reversing the tax-reduction process? Can you picture the havoc if by some quirk of fate, Bernard Landry managed to revive the separatist dream in Quebec and the Oui side began to skyrocket in the polls? We’d be below US$0.60 in no time.
I’ve said for some time that prudent Canadian investors should maintain a significant portion of their assets in U.S. dollar securities as protection against the continuing pressure on our currency. I’ve been accused of being unpatriotic because of this counsel. I have received e-mail telling me that I am personally contributing to the weakness in the loonie.
That’s hogwash! Currency speculators don’t give a hoot about what I’m saying. The reality is that the Canadian dollar is thinly traded on international markets. It doesn’t take much activity to drive it up, or down and most of that activity is carried out at the institutional level.
The advice to maintain a large U.S. dollar base in both registered and non-registered accounts is based on pure common sense and self-protection, nothing more. I do not advocate currency speculation, and never have.
Stick with decision
I do not suggest switching back and forth out of Canadian and U.S. dollars. What I recommend, very simply, is to make a decision on what proportion of your money you want to hold in American currency, and stick with it. The more time you plan to spend in the States as the years pass, the higher that percentage should be.
Our government appears unwilling or unable to do anything to protect the value of our dollar. It also has started flatly that it has no interest in exploring a common North American currency. That means we are going to have to live with the existing situation for the foreseeable future.
The wise investor will take appropriate action.
Reprinted from the July 16 edition of the Internet Wealth Builder.