Crazy for the Loonie—and Canada

08/06/2009 3:45 pm EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

The world’s greatest currency?

Not the yen, or the euro, or the renminbi. Sure as shootin' not the US dollar or the British pound.

Yep, it's the loonie, Canada's dollar with the ghostly-voiced diving bird on it. And not just at the moment, either. This is the currency I most want to own for the next decade.

Right now, all the currencies of global commodity producers are rallying. The Australian and New Zealand dollars, the Norwegian krone, and the Canadian loonie all hit 11-month highs against the greenback this week.

The belief that China has gone on a sustainable commodity-buying spree to support its economic recovery has caused commodity prices to soar—and so too have the stock markets and currencies of countries that have commodity-based economies.

At Wednesday’s close, the iShares MSCI Canada Index (NYSEArca: EWC) ETF was up 80% from its March 9th low (the Standard & Poor's 500 index rose 48% during that period), while the Canadian dollar has gained 21% against the US dollar. (EWC traded above $24 late Thursday—Editor.)

I'd put the loonie and Canadian stocks ahead of currencies and stocks of other commodity-based countries because Canada's commodity basket is the most diversified in the world. (Well, Brazil will give Canada a run for the money if the South Atlantic oil discoveries pan out.) Canada has Norway's oil, Australia's mines and farms, and New Zealand's timber and farms all in one package.

And Canada is better positioned in the interest rate cycle. High domestic interest rates—as long as they're not so high that they signal some major economic dysfunction—make a currency stronger. Canada's loonie is strong even though the Bank of Canada has set its target interest rates at just 0.25%, exactly where they are in the US.

That means there will be plenty of support for the loonie when the Bank of Canada—no sooner than the middle of 2010, it has said—starts raising rates again.

lso, the bank has repeatedly pledged to keep its hands off the currency unless its outlook on growth and inflation materially changes.

But finally, I prefer the loonie to the rest of the world's currencies—and certainly to the US dollar—because Canada’s accumulated national debt has been falling, not climbing, for most of the last decade.

After hitting a high near 80% of the country's GDP in 1995-2000, Canada's accumulated national government deficit has dropped pretty much every year until it stood at just 30% of GDP in 2008. In comparison, the US ended 2008 with an accumulated federal debt of about 70% of GDP, and it’s projected to head higher.

Both countries have gone to the debt well in the current Great Recession. In its 2009 fiscal year, Canada will show its first budget deficit in 11 years. Because of its own stimulus spending and falling tax revenues in a slower economy, economists forecast a deficit of $C64 billion over the next two years. Canada isn't likely to see another budget surplus until 2014.

If only the US was looking at nothing worse than that! The US budget deficit for fiscal 2009 will be something like $1.7 trillion, and the red ink stretches as far as the eye can see. Listen carefully when US politicians talk about fiscal responsibility: All they promise is to reduce the size of the annual deficit, eventually. Nobody is talking about actually reducing the size of the accumulated deficit.

By about 2025, the accumulated US federal deficit will break the old record of 108.6% of GDP set in 1946 (after the Great Depression plus World War II). But unlike 1946, the ratio of debt to GDP won't start falling after it hits that mark; it will just keep on climbing.

The US isn't unique. Things are even worse in the United Kingdom, Japan, Italy, most of the developed world, and much of the developing world.

It's Canada that's unique in its relative fiscal soundness. You should put some money north of the border.

Where? See today’s posting for the names of eight Canadian stocks to buy…but not right now! I think we're getting closer and closer every day to a correction that should help you get in at a better price. This is a long-term trend that you'd like to see on your side.

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