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|Subject: CANADIAN DOLLAR||Date: 3/26/2009 7:10 AM|
|Author: Starrob||Number: 72 of 87|
"4. WHY THE CANADIAN DOLLAR IS ONE OF THE BEST U.S. DOLLAR HEDGES
For those seeking to diversify out of the USD, the CAD is one of the best alternatives.
A. Grand Banks
Perhaps the most compelling reason to have a stake in the Loonie is the banking system behind it. Unlike most of the world, the Canadian banking system is a source of relative strength. Due to more effective regulation and conservative management, Canadian bank avoided subprime lending. They were not allowed to shift capital into more speculative businesses and endanger their overall health.
Thus the Canadian financial institutions will not be costing taxpayers trillions in bailouts. Loan default rates remain low, the banks’ finances and deposits are sound, and credit is available. Fourth quarter results far exceeded expectations on Wall Street and Bay Street. Most dividends were well covered or affirmed based on expected improving conditions later this year. Profits did suffer due to asset write downs, but the need for government assistance has been limited. The better Canadian real estate firms are actually performing relatively well.
Thus supply of CAD will not be expanding by orders of magnitude, unlike the USD, for massive bailout programs, and the CAD should retain its purchasing power far better.
Last year, a group of international banking experts was formed called The Group of Thirty. In January, this panel of former central bankers, finance ministers, and academics chaired by former US Federal Reserve Chairman Paul Volcker, issued a report with recommendations for repairing the world financial system and preventing a similar crisis in the future.
The report, Financial Reform: a Framework for Financial Stability, essentially recommended imitating much of the Canadian banking system. Its recommendations included:
* Imposing capital limits on bank run trading operations.
* Barring large commercial banks from running hedge funds and private-equity firms that mix bank and client funds.
* Tightening government oversight of other kinds of financial institutions like insurance companies, investment banks, and broker-dealers.
In short, the report argued that because the financial services industry is so fundamentally essential to economic stability, it become more like the regulated utility industry – dominated by fewer, well capitalized players with more government supervision to preserve their health and continuity, albeit at the expense of avoiding more potentially profitable but speculative and risky businesses.
B. The Loonie Is a Commodity Based Currency
Because commodity exports are such a large part of the Canadian economy, the CAD tends to follow prices of energy, and other key commodities like grain and iron ore, etc. Thus they have all fallen together in the current slowdown.
However, as world populations continue to expand, even less than robust recovery will ultimately drive essential commodities higher, and so too support a rising Loonie.
Of course, there are other factors influencing how the CAD and USD fare against each other and other currencies, and the Australian Dollar shares much of the CAD’s USD hedge characteristics. Nonetheless, the CAD is a compelling hedge against the USD."
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