The Loonie’s Swoops and Dives

11/05/2008 12:00 pm EST

Focus: MARKETS

Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

Gordon Pape, editor and publisher of Internet Wealth Builder, traces the rise and fall and rise again of the Canadian dollar and predicts where it’s going.

Just five weeks ago, the loonie was trading at US 93.16c. It took C$1.0734 to buy one American greenback.

Since then, [the Canadian] dollar has looked more like a diving pelican than a high-flying loon. [It recently traded] at US 78.56 cents, [meaning that it took] more than C$1.27 to buy one US buck. That represented a drop of 15.7% in the value of our currency in slightly more than one month. Where next? At this rate, we'll be back to a US 62 cent loonie before year-end!

That's probably won't happen, of course. Currency movements often overshoot the mark before putting on the brakes and correcting. Remember, it was only a year ago that our dollar was at US $1.10 and some economists were predicting it could go to US $1.25 on the basis of momentum alone. No one pretended our loonie was actually worth that much. It had been driven far higher than its intrinsic value by speculators.

Now we see the flip side. But the current momentum has carried it well below that and it is very possible it could fall even more before the brakes take hold. We've got a runaway train on our hands.

When our dollar was high, a lot of people worried: manufacturers, tourism officials, exporters, politicians, even the Bank of Canada. Now that it is plummeting, some of those folks feel a little better—after all, a cheaper loonie will make it easier to sell Christmas trees to the US market! But now we have a new group of worriers: sports moguls, snowbirds, importers, retailers, and, oh yes, the Bank of Canada again. The central bankers sure have a lot on their minds these days!

The loonie should be worth a lot more than US 78 cents. Even if parity is a long way off, my view is there is a better-than-even chance that the loonie will bounce back to the US80c to US85c by year-end. Economists differ on exactly where it should settle, but US 85 cents is a popular figure. (It had bounced back to around US 87 cents by Tuesday—Editor.)

So, I can't tell you when the right time will be to buy US currency in the short term. Over time, as world commodity prices recover and economic growth returns, our loonie will rally. It may not come close to par again for a while, but an exchange rate in the US 85 cents—US 90 cents range would seem to be realistic. For now, however, you are going to have to pay more for that vacation or stay home for a while.

No guarantees, of course—not in these wild times. But personally, I'm going to hold off on buying any greenbacks for a while. I'll wait until they're on sale again.

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