Since our last discussions, the U.S./Canadian exchanges rates finally reached parity after a long, long journey for the Canadian dollar being laughed at and called Monopoly money, and worse.
Two trends have helped the Canadian dollar in the last few years, and both of which are still very much alive.
1. The continuing boom in the resource and commodities sector have helped the few countries which have them in abundance, such as Australia, Brazil and Canada. The middle eastern currencies are pegged to the US dollar, so move along with it, but must create a lot of local currency to keep the peg in place.
Since we are in the middle of a long-term bull market (usually 16-19 years), this trend is firmly in place. We will of course see fluctuations and we are currently overdue for a major downward correction, which is healthy for its support.
2. The U.S. Federal Reserve is still printing money like there was no tomorrow, with M3 money supply growing at 12-15% levels per year. It is also in the midst of a sizeable bailout of Wall Street, accepting worthless (?) paper such as CDO's in exchange for treasury notes. It has other programs as well that creates liquidity for unsolvent Wall Street firms, in order to avoid a repeat of the Bear Stearns fiasco.
This trend can be stopped and reversed, but who will have the courage to do it? The shock at this point would create a major recession. Might as well keep the trend running a bit longer and hopefully pass it on to another set of people, and maybe even to the next generation <evil snicker>.
So what will happen to the exchange rate really? The one unknown factor, at least to me, is how the Bank of Canada will react. It is also expanding money supply, but at a slower pace than the Feds, and the pace is accelerating. Are we in a race to the bottom with the US only time will tell!
As of today, Canada's GDP is growing at 4.9% rate (real GDP at 1.7% ). The M3 measure is growing at a 12.6% rate, so we are in highly inflationary monetary conditions, almost at US levels. This would lead us to see two things: a stabilizing exchange rate with the US (which has already been stable for 6 months or so), as well as a continuation of quickly rising consumer prices.
Comments