Hi, just a few thoughts about the rising Loonie. Another instance of happenings south of the border, affecting us here in Canada.
Last year we saw the loonie rise past $1 US, and watched it put a dent in the posted value of US denominated investments you held. Once again the Loonie seems to be on the rise, now passing the 96 cent mark. While this makes shopping and vacationing in the south more attractive, it will have a negative effect on some things closer to home. Purchasing power does not rise in lock step with the loonie. It takes 6-9 months for prices to equalize, although pressure is often placed on Canadian retailers to match their counterparts across the border, by the time the effect of the higher loonie works it way through the system, it will likely have settled back down, and any perceived advantage will have been lost.
The value of US denominated stocks and mutual funds might drop on your statements. The dollar conversion may not offset the rising US stock market. It is quite possible for the price of an investment to be rising in US dollars as their stock market continues to rebound (the Dow is once again closing in on the 10,000 mark). And yet because of the rising loonie, your stocks or mutual funds have stayed flat or even decreased. This should be corrected when/if the loonie returns to an equilibrium state.
Will the loonie drop back? Historically it does tend to trend towards equilibrium, and usually drops back to a normal range after a spike. Is this time different? Maybe. The US is in a difficult situation, they have a great deal of debt they must deal with at a time when their unemployment rate is still over the odds, and their tax receipts (government income) are falling. When their economy turns around their tax receipts will increase, and they should be able to reduce some of their recession induced spending (one would hope). If this is the case, then we can expect them to get their house in order.
However – and there are two big howevers. First the US government historically has been good at increasing spending and very poor at pulling in the reins on special interests once the situation changes. They also have a very poor record of increasing tax receipts (income) by raising taxes in the good times, in order to pay off debt run up in the bad times. Secondly, the Chinese are a wild card in all this. They currently hold a very large proportion of US debt, and are making noises about shortening the reins. We can only hope that they do not want to do anything that would devalue their own investments, and so will not undertake any precipitous actions.
Regardless, even if everything goes along as expected, without any major disruptions, it is quite conceivable that the only realistic way for the US government to get out from under the burden of debt they currently carry will be to allow inflation to rise. Inflation will devalue the dollar and the concurrent debt. So they will be able to pay back today’s debts in tomorrows inflated cash. Good for anyone currently carrying debt, bad for the purchasing power of your savings and RRSPs. Keep this in mind for the future, and when you are thinking about future savings decisions, and planning options.