The last time the loonie CADUSD-FX was this weak, the only economy Donald Trump seemed intent on destroying was Atlantic City’s.
You have to go back to 2003 to find a lower low than the one the Canadian dollar touched last week of 68.7 US cents, on an intraday basis.
Back then, Canadians were accustomed to living with a sub-70 US cent loonie. Until a commodities supercycle revived the Canadian economy in the mid-2000s, the currency spent years in the dumps.
Any Canadian spending money or doing business in the U.S. knew how much a weak currency could affect one’s finances.
The same goes for investors. Major volatility in the exchange rate affects the value of foreign securities when measured in domestic currency. It also affects how far your money will go when investing outside Canada’s borders. And it scrambles the fortunes of the corporate sector depending on each company’s level of cross-border exposure.
Canadian investors might reacquaint themselves with a depressed loonie reality. The Canadian economy is in trouble. And tariff brinksmanship is set to consume us all again in a few weeks, if not indefinitely.
Here is what you need to know.
Get used to a cheap dollar
A last-minute reprieve in Mr. Trump’s continental trade war saw the loonie bounce by about 2 US cents over the past week or so.
But there is only so much the loonie can rally given what the country is facing.
“Investment and sentiment levels in Canada have taken a severe hit,” Karl Schamotta, chief market strategist at Corpay, a foreign exchange and payments company, said in a note. Currency traders are positioned for more downside, he added.
There are a few reasons why. Overall confidence in the Canadian economy is certainly part of it. So is demand for Canadian dollars, which declines when tariffs make our exports more expensive for U.S. buyers. Plus, why would foreign investors want to commit money to a country that is shrouded in trade uncertainty?
Then there is the interest rate gap. The Bank of Canada has been steadily cutting its policy rate much more aggressively than the U.S. Federal Reserve.
The distance between the two is now about 1.4 percentage points – the highest in nearly 25 years. This is a negative for the loonie since money tends to gravitate toward higher returns.
The loonie is where the action is at
Canadian stocks have been happily oblivious to tariff madness. In the last four months, the S&P/TSX Composite Index TXCX-I has gained about 6 per cent – roughly the same as the big American stock indexes.
Canadian stocks took a decent hit when it appeared as though tariffs were imminent. But nothing commensurate with the threat to the Canadian economy.
The TSX is cushioned somewhat from domestic mayhem by its strength in natural resources, which align it more with global forces.
But the loonie gets it. It dropped by nearly 5 US cents over the last four months, before its latest relief rally.
As goes the trade war, so goes the loonie.
How Canadian investors are affected
If you own U.S. stocks – and these days, who doesn’t – you’re already a currency speculator of sorts.
When the Canadian dollar depreciates, the value of U.S.-denominated holdings automatically goes up. This effect has generally worked in Canadian investors’ favour, considering the loonie has been on a downward trajectory ever since the commodity boom started to fizzle out around 15 years ago.
Over that time, the loonie has declined from a peak of around US$1.06 to the lowly 70 US cent mark we find it at today.
That currency boost would have added to whatever returns U.S. stock holdings conferred over that time, once those investments are converted back to Canadian dollars.
So, it might be a good time to cash out of some U.S. positions, especially for those who find themselves with too much money in American stocks.
The flip side of that currency effect is that new money invested doesn’t go nearly as far as it once did in the U.S. stock market. There’s no getting around this. For some, it may shift the calculus when it comes to committing additional money to U.S. equities.
Winners and losers of the TSX
Beneath the Canadian stock market’s calm surface, great changes are afoot. Trade-exposed names have been clobbered, such as MDA Space Ltd., NFI Group NFI-T and Bombardier Inc. BBD-B-T
At the top of the market, on the other hand, are gold miners, which tend to benefit from a weak loonie. That’s because they generally sell what they produce in U.S. dollars, while paying costs in Canadian dollars.
Of the top 30 performers in the Canadian benchmark index year to date, 24 of them are gold miners.
The oil and gas sector would normally find itself among the beneficiaries of a falling loonie, but the threat of tariffs seems to be nullifying the upside. While miners can sell into the global market, the vast majority of Canadian energy exports go to the U.S.
“Whenever the loonie is weak, we get all these notes telling us to invest in these companies that do a lot of U.S.-dollar business,” said Laura Lau, chief investment officer at Brompton Funds. “But the big question this time around is tariffs.”
Some sectors might be right in the sweet spot alongside gold miners. The big Canadian life insurers, for example, have substantial U.S. revenues.
“And you can’t tariff a service,” Ms. Lau said.