Four strategies to profit from the flightless Loonie.

Trudeau 2 will have a similar impact on the Canadian dollar as Trudeau 1.
65 cents, here we come.

C$US$Exchange rate

I was reading about the latest Throne Speech of the current Government. What struck me (and others) was the similarity of over spending to buy off the opposition parties as the previous Trudeau PM had undertaken. $6 billion in tax cuts financed by $6 billion in debt ? A focus on cutting emissions in a country that is responsible for 1.6% of the world’s carbon emissions when China produces 27%, the US produces 15%, and the EU produces 9% ? But I suppose that if you want to be able to tell Trump jokes to Emmanuel Macron, you have to be a serious world leader. Just as we are with our mighty military with our antique planes, ships and army, and a spend of 1.2% of GDP, despite our NATO committment to spend 2%. But as usual, I digress.
What I really want to say is that I believe as others do that Trudeau 2 (son of) will drive the economy and Canadian dollar down, just as Trudeau 1 did. In 1974 the C$ was worth US$1.04. By 1980 it was US$.85 and by 1986 it hit US$.69, a decline of 34%.

Please read:Last time a Trudeau had a minority

 

trudeaus
Why is this likely to occur again ?
First of all, lets remember that the C$ has already declined from US$1.06 in 2011 to US$.755 today, a decline of 29%. Given the current government’s focus on saving the world from climate change, deficit spending, unfriendly business environment, and anti resource development attitude, massive amounts of money will continue to flow out of this country. For example, TD Bank now has more branches in the US than Canada. Enbridge and TC Energy (used to be Trans Canada) own more US assets than Canadian. Great success story companies such as the Brookfield conglomerate have far more assets outside Canada than in. All of which makes them great investments to offset the declining Loonie.

I think it likely that the C$ will exceed the lows of the previous Trudeau era, hitting US$.65 or less. That means that to buy a US$ will cost C$1.54. The Canadian stock market is unlikely to do well in this situation. But as Jim Cramer says, “there’s always a bull market somewhere”. And the bull market for Canadians will be in non Canadian assets.

In 2016, Peter Muldowney wrote an excellent history of the C$ – US$ relationship and its causes. It shows how the deficit spending and anti energy policy of Trudeau 1 led to a $.69 Canadian dollar. The situation is eerily similar to today and the lessons remain applicable. The American philosopher George Santayana said “those who forget history are doomed to repeat it”.

See Peter’s analysis here:

Brief history of the Canadian Dollar
So how to profit from this possible scenario ? Here are 4 potential strategies for Canadians.

1. Buy US dollars.
But don’t pay the outrageous 2.5% exchange fees that the banks charge. If you have a Direct Investing brokerage account, buy the ETF “DLR” which basically holds US dollars. Once the trade closes in 2 days, call your broker and for free, have them convert your holdings to DLR.U, which you then sell for $9.95 and get US dollars in exchange. For $10,000, your total fees are $20, or 2/10 of 1% in fees.

For more info on how this is done, see “Norberts Gambit” here:

Norbert’s Gambit, Canadian Money

2. Buy Canadian companies with extensive US and foreign holdings
As mentioned above, TD Bank, Enbridge, TC Energy and the Brookfield companies are examples of Canadian companies that all have extensive US and foreign holdings. As the C$ tanks, their income will rise. And they and others are co-listed on the NY Stock Exchange in US$. You can buy them in C$, and for free, ask your broker (online or other) to convert them to their US listed version. You will now begin collecting your dividends in US$, sans any exchange fees. And you will have protection from the sinking Loonie as these companies have extensive assets outside of Canada. (Full disclosure – I own shares in all of these companies).

3. Buy Gold related companies
Gold is denominated in US dollars, so as the Loonie tanks companies with gold holdings will enjoy increased earnings and valuations. Check out Franco Nevada (FNV) which I liken to an actively managed ETF. The shares are up about 30% in the past 12 months, and up about 128% in the past 5 years. If gold increases to $1800 again from $1460 today, as it did in 2012, FNV will benefit both from the increase in the value of gold and the declining C$. (Full disclosure – I own FNV shares). For more information, see my blog article on FNV here:

FNV – like an actively managed ETF

4. Buy the US stock market
With a C$ denominated ETF like VFV or HXS, you can own the US S&P 500 in Canadian dollars. These ETFs are unhedged, so any decrease in the Loonie means an equal increase in the value of this ETF. Plus, if the US market does well, you get that benefit as well.

HXS is a total return ETF. That means that there is no dividend income which would otherwise be taxed at your highest marginal tax rate in a taxable account, and all gain is capital gain. So until the Trudeau government increases the capital gain inclusion rate above 50%, your tax rate when you eventually sell is half of your normal tax rate.  For more information please go here:

Vanguard ETF VFV

Horizons ETF HXS

 

For my international readers, the answer is more limited. Buying FNV in either C$ or US$ will give exposure to both gold and the US$, and offer a nice counter position to a market collapse, which is when gold seems to shine.

Please remember, this post does not provide personal investing advice.

All investing involves risk, and exchange rates are difficult to predict. Before making any investing decisions, investors should conduct their own due diligence or seek the advice of a registered investment advisor.

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