Canadian dollar polarizes expert opinions

Gavin Graham, GGOF’s chief investment officer suggests Canadian oil and other commodity prices, along with budget and current account trade surpluses, will combine to strengthen the Canadian dollar. As well, he says a weakening American economy would not impact Canadian commodity prices to the extent predicted by some forecasters since the emerging markets of Asia will continue buying. “The U.S. is no longer the major price influence,” he says. “It’s certainly rivalled by China as price setter for things like copper or aluminum or oil.”

The weakening U.S. housing market, meanwhile, suffering under the weight of adjustable-rate mortgages, will continue to weigh on the American dollar. In the U.S., monthly mortgage payments have jumped as much as 70% in some cases, as adjustable-rate mortgages are reset using higher interest rates. (The U.S. Federal Reserve raised its short-term interest rate from 1% in June 2004 to 5.25% in June 2006 — 4.25% in two years.) Higher mortgage payments mean lower consumer spending, a weaker housing market, falling house prices and reduced consumer ability to use their “houses as automatic teller machines,” a phrase used by analysts to describe individuals using proceeds of refinancing to buy consumer goods, further contributing to slowdown. On the other hand, Graham says if the Federal Reserve lowers rates as anticipated, the move will weaken the American dollar’s attractiveness.

Taking a more conservative view, but still citing positive trade and fiscal balances in Canada and a weak American housing market, the Fiduciary Trust Company of Canada says the U.S. dollar will end next year in a range between $0.87 CDN and $0.90 CDN. “There’s nothing that points to the currency moving out of that range at this time,” says Fiduciary Trust senior vice-president Paul Vaillancourt. Vaillancourt predicts eventual parity between the two currencies in the longer term.

Coming in between GGOF’s aggressive forecast and Fiduciary Trust’s more conservative forecast, Toronto-based Scotia Capital Markets estimates the U.S. dollar will be at $0.917 CDN by the end of 2007, says currency strategist Camilla Sutton. She says another factor adding to the strength of the Canadian dollar will be the continued emergence of Canadian-dollar-based mergers and acquisitions by foreign interests. “When they do that, they buy a lot of Canadian dollars to pay for those companies.”

Meanwhile, BMO Capital Markets says there will likely be no surge in commodity prices, and barring any unforeseen events, rates will likely remain stable with no major changes.

Although these forecasts may be valid generally, they’re not a good basis for portfolio decisions, says Paul Bourbonniere, principal at Toronto-based Polson Bourbonniere Financial Planning Associates.

“If we all knew that a year from now the dollar would be 95 cents why is it [lower] today?” he asks. “There are as many people who think it’s going to be below 95 [cents] as think it will be at 95 [cents].”

Bourbonniere, a value investor, insists that portfolio decisions need to be made based on factors within the purview of advisor and client. “We’re going to control the things that we can control. Currency is not a thing that we can control, so we are really downplaying predictions.

“They’re educated guesses. Whether we agree or disagree is irrelevant,” he says, adding that the eventual outcome cannot be established. “Taking forecasts into account is to make a bet, and we do not bet,” he says.

Al Emid is a Toronto-based financial services journalist.

(12/29/06)