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Time to short the Canadian dollar

Today's Financial News - Posted October 30, 2008

With its main source export revenues plunging down over 50%, the outlook for the Canadian economy and the Canadian dollar is getting bleaker by the day.

by J. Christoph Amberger

Baltimore — (TFN): Oil prices dropped once again after the U.S. government reported a 0.3% contraction in the U.S. economy in the third quarter.

Light, sweet crude oil for December delivery fell by$1.91 to $65.59 a barrel on the NYMEX. Overall, oil prices are now down 55% since the peak of $147 a barrel in mid-July.

Thanks to lower energy and resource prices and a surging dollar, yearly consumer inflation in the United States peaked at 5.5% in July. It is now set to fall to close to zero by early 2009. Good news for people who’re holding dollars. Not so good news for our neighbors who made a mint on exporting oil to the States.

Canadians like to point at U.S. “financial turmoil” to explain the sudden drop in oil revenues and the decimation of the exchange rate.

But applying the moral standards espoused by America’s global critics during the boom years — namely, that an evil or at least reckless America was raping the world by consuming so much — we prefer to think there now should be a sense of universal satisfaction with the fact that the U.S. has stopped over-consumption.

(We just hope they prudently saved the revenues surplus for a rainy day!)

American frugality, however, will limit Canadian economic growth to 0.8 per cent this year. Despite several months of negative growth, Canada still hopes to avoid a recession, according to the Conference Board of Canada. But in real terms, Canadians may feel like they’re in recession already as inflation is predicted to come in a 3.3% annual pace.

Falling oil prices are now eroding the economic viability of the crucial Canadian production from oil sands. At the same time, dropping resource prices are threatening to plunge metal mines back into fiscal obsolescence. Once they hit certain prices, mines and wells will not sinply be scaled down but shuttered. In many cases, it’s an all or nothing proposition.

Canadians are still arguing that China will make up the shortfall. We wish them good luck.

Low Canadian growth due to flagging resource and energy exports to the United States may result in increased government spending, budget deficits, unemployment and increasing inflation in the Canadian dollar.

At this point, I believe the days of parity between the two North American currencies are gone for good. And unless Celine Dion is deported back to Quebec for lack of social empathy, it’s time to short the Canadian dollar.

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Posted by J. Christoph Amberger · Filed Under International Investing 

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