Plight of the loonie

The recent fall of our dollar is cause for real concern. It’s akin to a baseball team losing a game after being ahead 10-0. It’s something that simply shouldn’t happen. The fact that it did speaks volumes about the weakness of our currency in the international marketplace.

Yet we’re experiencing a combination of circumstances that would appear to favour a strong Canadian dollar:
· Our Finance Minister has announced a record surplus for the 1999-2000 fiscal year. All of it went towards paying down the national debt. We’re on track for yet another record surplus in this fiscal year, even if you consider an orgy of pre-election spending and tax cuts. The first four months alone in this fiscal year threw off an $11.4 billion surplus.
· Then we have high oil and gas prices. Remember why they said the loonie was depressed a couple of years ago? Low commodity prices. Canada was still a resource-based economy. Weak prices meant a low dollar. So now we have high prices (other commodities are on the rise as well). And what do they translate into? A low dollar.
· We’ve had foreign exchange pouring into Canada to take advantage of our strong stock markets.
· Our inftion rate is below that of the U.S.
· Our productivity numbers are improving.
· Our tax rates are coming down (often cited as another cause for a low loonie).
· Our export surplus is strong, in sharp contrast to that of the U.S.
· Our provincial governments are all in surplus.
· Our household standard of living is on the rise again, finally.

And where does the loonie go? Down! Imagine what would happen if things went bad.

Why the jitters?
The recent tumble was blamed on international support for the Euro (a currency that’s even weaker than ours) and election jitters. Election jitters? Come on, get real. Jitters about what? Either the Liberals will get re-elected, in which case it’s more of the same old thing except with bigger surpluses to spread around. Or the Canadian Alliance will pull off a huge upset, in which case we get even tighter controls on government spending, more tax cuts, and more debt paydown. What is there in either scenario that would make currency markets jittery? Surely no one expects the NDP is going to rise out of the swamp and form the next government of Canada!

Our dollar is down 4 per cent against the U.S. dollar so far this year. That is an absolutely abysmal performance given the financial and economic condition of this country. It certainly reinforces the case for a common North American currency. It absolutely says that smart investors had better hedge their currency bets. If there is any kind of bad news at all, or even mildly upsetting news, our loonie is vulnerable to big losses.

Defensive action
One reader wrote recently to say he now routinely keeps half his assets in U.S. dollars because he simply does not trust Canada’s currency in the long term. I haven’t gone that far personally, but I have been increasing the percentage of U.S. dollar securities in my portfolio in recent years, especially in my RRSPs. I am going to accelerate that process in the light of last week’s events. I don’t care how often the economists repeat their mantra that our dollar is really worth something like US$0.75. I don’t think that is going to happen any time soon, and it may never happen. In any event, I don’t want to bet my retirement income on the fortunes of the loonie.

You may want to take similar defensive action. At the very least, I recommend that 25 per cent of your assets be held in U.S. dollar securities. And that should be your on-going strategy, until the Prime Minister of Canada publicly states that a low Canadian dollar is eroding our standard of living and that it will become government policy to take measures to boost its value to a realistic level.

I don’t expect to live that long.

The Internet Wealth Builder is a weekly e-mail newsletter edited and published by Gordon Pape. Subscription information is available at: