Protect your loonies

To hear the economists tell it, our loonie should be trading at somewhere between 70 cents and 75 cents U.S. on the international currency markets — maybe even a bit more.

That’s the theory. We all know the reality. Our dollar hasn’t seen 70 cents in some time and recently it was under pressure again, dipping to below the 65cent level.

We all have to be concerned about that.

Our country is in terrific shape right now. All our governments, federal and provincial, have lots of cash and most of them are running surpluses. Ottawa recently paid down the national debt by $12 billion, a huge reduction in a single year.

A few years ago, our governments were so badly in deficit there was talk the International Monetary Fund might have to step in. A weak dollar in those conditions was entirely understandable. But those days are gone.

Positive indicators

  • Look at oil and gas prices. A couple of years ago we were told that weak commodity prices were pulling down the loonie. But that too is ancient history. We’re getting top dollar for our energy, and I was reading the other day that we’ve now become the number one foreign supplr for the U.S.
  • High taxes were said to be holding back the loonie. So now governments at all levels are cutting taxes. What’s the loonie doing in response? Putting its head under its wing.

The good news keeps coming

  • Household income is finally on the rise again.
  • Our productivity numbers are improving.
  • Unemployment is low. Foreign investment is pouring in.
  • Our trade surplus is strong.
Heck, with all this happening you’d think our currency would be worth more than the U.S. greenback.

    Instead, it can’t even make it back to 70 cents. A few economists now suggest it will see 60 cents first! And this is happening when everything is working in our favour. That raises the obvious question:

    • What’s going to happen to the loonie when economic conditions in this country take a turn for the worse, which they inevitably will?

    Reasons for weak dollar
    Why is our dollar still so weak? One reason is because it’s clear the government isn’t anxious to see it go up. Prime Minister Chretien has said as much. He likes the cheap dollar because it makes our goods more competitive in international markets.

    By that, he of course means the U.S. market, which is far and away our biggest customer.

    In fact, the loonie has actually risen against most of the other major currencies this year. But in practical terms, its value against the U.S. dollar is the one that really matters.

    In the light of what has happened so far, it seems very unlikely that we can expect to see our currency rise to purchasing power parity with the U.S. dollar any time soon.

    In fact, that probably won’t ever happen unless and until the government of the day adopts the official position that our currency is indeed undervalued and announces that it will take steps to correct the situation.

    Failing that, or a common North American currency, it looks like our loonie is unlikely to go anywhere but down.

    Protecting your dollars
    So what should you do? I believe you should take steps to protect your assets against further currency fluctuation. That means keeping a significant amount in U.S. dollar denominated securities.

    You don’t even have to invest in American securities to do it. There are lots of ways to hold U.S. dollars and keep your money right here at home.

    For example:

    • The federal government and all the provinces issue bonds from time to time that are denominated in U.S. dollars.
    • You’ll also find a number of common stocks and preferred shares on the TSE that are denominated in U.S. dollars. Bank of Montreal, CIBC, CN Rail, Inco, and Royal Bank are just a few of the companies that have U.S. dollar offerings.
    • Many mutual fund companies now offer units in both Canadian and U.S. dollar classes. And, of course, if you buy into a U.S. equity fund, all the shares in the portfolio are denominated in U.S. dollars.
    • You can invest in U.S. dollar GICs and term deposits at almost every bank and trust company.

    The list goes on and on.

    Retirement fund protection
    Many of these securities are fully eligible for RRSPs and RRIFs. Even though they’re denominated in U.S. dollars, they don’t come under the foreign content limits if they are issued by a Canadian government or institution. So you can build currency protection into your retirement savings plan as well.

    How much should you have in U.S. dollars? It depends on your future plans, but 20 per cent to 25 per cent is a good target. If you’re considering spending a lot of time in the States, say during the winter, you might want to aim even higher, say 50 per cent.

    I’m not advocating currency speculation here. I’m talking about currency protection. If that’s important to you, decide what level makes the most sense and then stick to it, regardless of short-term market movements.

    The only time to change strategy would be if the government gives the signal it wants a higher Canadian dollar, and acts accordingly.

    Adapted from Gordon Pape’s weekly CBC radio broadcasts, which are heard in most parts of Canada. Check with your local CBC station for the day and time in your area.