Is it Crazy to Hold the Loonie?



By: YOSEF TASTASSA  
Published: December 21st 2010
in Economics » Local

Canadian Loonie

USD against CAD

 

If you look at the exchange rates of the Canadian Dollar against the US Dollar, you will find that in the past twelve months, the US Dollar was traded for more than 1.035 Canadian Dollars and in February-March it reached the peak of 1.07 CAD per one USD.

 

Since October, the CAD got stronger and it is traded at a narrow range of 1.00 – 1.02 CAD per one USD. The fact that the CAD got stronger is not surprising at all. The US economy did not show any significant signs of recovery, and Ben Bernanke's QE2 is flooding the markets with American Dollars. These two factors have weakened the USD around the world including in Canada.

 

The US Macro Data

 

When hearing about the US macro data, many investors are beginning to develop a positive attitude towards a recovery in America. The housing and the labor market are still a burden but the other sectors are beginning to show a very slow but sustainable and positive growth data.

 

US export is at a boom, the consumer sentiment is getting better and Christmas will only boost the end of the year data.

 

Forex investors

 

To many currency investors the current exchange rate may be an opportunity. A strong US economy is eventually a strong US Dollar. If these investors think that the exchange rates in December 2011 will be 1: 1.10 USD/CAD they see an opportunity for a 10 per-cent upside on their money.

 

How to invest in the USD?

 

There are many options to invest in any foreign currency. The best way is to buy US Government bonds. The yield for 1 year is around 3.27 per-cent. If you think that the CAD will weaken by 10 per-cent in one year than the upside on your money is 13.27 per-cent.

 

Remember that the US bonds are affected by the market and by the credit rating agencies, downgrading the US credit rating can bring heavy losses.

 

Another way is to simply get a deposit that's in US Dollars. The interest will be low but so is your risks as bonds are not involved.

 

The riskiest way in the Forex market is to buy Call (Long) options on the US Dollar. Your profits may be thousands of per-cents, but so could your losses.

 

Summary

 

The Forex market is an interesting means of investments but also has the highest risks. Currencies fluctuate against each other without any rational reason.

 

The current equilibrium between the CAD and the USD may be an opportunity, but it can bring heavy losses as well. Choose your steps wisely before investing in the Forex market.

 

This article does not recommend investing in the capital market.



Related articles: (Canadian Dollar, Forex, Bonds, US Dollar)

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