Currency Conundrum

Canadian investors holding US stocks have felt the pain of a rising loonie since the beginning of this year. Both rising commodity prices – which strengthen our petrocurrency  – and a weakening of the USD in world currency markets – put significant pressure on the Loonie/USD exchange. The USD lost about 7% since January on a world currency exchange basis, and closer to 12% against the Loonie over that same period.

 

We at ValueTrend experienced some negative side effects of this change. Our equity platform performance is reported on an after-conversion basis – so our USD stocks fought a double-digit currency draw-down over the past 4 months. While we did cut our USD holdings in half early this year (from about half to about a quarter of the portfolio), the US stocks we held certainly pushed against some otherwise positive stock performance. I’m sure that many of my readers are in similar positions when viewing their CDN$ value of US holdings since January.

 

The question now is – will the Loonie continue rising, continuing to put pressure on the converted value of our US stocks – or is it going to settle soon? Today’s charts may help offer guidance on the future direction of our loonie vs. the USD.

usd

Chart number one (above) is that of the USD vs. a world basket of currencies. I’ve shown this chart before on this blog. In fact, I’m happy to say that I predicted the USD to reach current levels more than a year ago – and offered the same technical points shown on this chart as my estimated target zone. That was one of the drivers behind ValueTrend reducing our USD exposure a few months ago. As noted on the chart, the USD is likely to be contained within my aforementioned resistance zone of 93-100 (world currency index units). At this time, the USD looks to be bouncing off of the bottom of that range from an oversold level. See the neartermed chart of the USD below. This suggests the potential for a return to the top of the range–which represents about 6-7% upside from here.

usd short

Meanwhile, chart number three below shows the loonie – which now sits at 0.77 USD. The loonie recently reached my predicted 0.79-0.80 resistance point on this chart originally posted a year ago. The loonie had a strong run of it as commodities rose and the USD declined. Its not surprising to see a retracement beginning after such a parabolic move into overbought territory. In the loonies favor is a healthy chart for continuing strong oil prices – at least at this point of time.

C$

My guess is that we will see a pullback into the 0.74 area for the loonie vs. USD. Seasonality begins to weaken for energy after May, and there is some short termed momentum starting to build on the USD vs. its world currency counterparts. In other words, we may see a bit of upside on our USD stocks on a currency adjusted basis (all other things being equal)  in the coming weeks or months. Support at 0.74 will be positive for the loonie – but it will need to prove valid before calling it from this juncture.

7 Comments

  • Seems like all the analysts and pundits are saying sell in may this year. The market may well do just the opposite.

    Reply
    • Could be!
      We’ve gone “neutral” via a mixture of stocks we like, including an overweight level of low beta– cash, and some hedge.
      We will make -or lose- very little in a rising or falling environment – but we are comfortable with that stance at this point. Subject to change if/as/when the s&P breaks 2135.

      Reply
  • Keith, is it worth trying to get into any energy at this point?
    Im a bit wary after the run up.

    Thanks,
    -Bob

    Reply
    • WTI Crude has a fantastic chart. But its temporarily overbought when viewing RSI, stochastics etc., and its hitting a bit of technical resistance around $48-$49. I would think a pullback is due –hard to say where it might go — but $44-$46 is the likely level. Having said that- oil is news driven right now, and can drastically move in either direction on an emerging story–and its also coming to the point of seasonal softness (after May).
      I think if you have a multi-month perspective, it will be a good play no matter how much you refine a buy point. Like noted–its a great looking weekly chart–and I suspect $60 is not unreasonable as a target. It might be worth waiting to refine a lower buy point, but that’s assuming no surprise news…

      Reply
  • Those of you who had U.S. securities while the CDN $ dropped precipitously benefitted greatly but are now paying the price.

    Frankly, I find investing in individual securities challenging enough without adding currency exchange to the mix which doubles (or more) the analysis. This does limit me but I try to find foreign investments in ETFs that hedge to Canadian dollars.

    Reply
    • Thats correct Fred-for example-we made the decision to up our US stocks 2 years ago because we prefer their market, didn’t like commodities at the time, and wanted the USD upside. It helped the performance last year for sure.
      We reduced the US stocks this year–but even holding the small amount we held (less than 25%) took returns down. However, that’s part of the game. As the Led Zeppelin song went: “Nobody’s fault but my own”.
      The currency hedged ETF’s are, as you note, a good solution–with the only negative being their higher costs (which are justified in big-swing currency environments like now) and their index-type structure vs. picking individual out performers. In the recent past–the currency hedging offset any increased alpha on stock picking-so they were a great place to be-no guarantees that is the case in the future. But still– a great solution to that potential problem, and we like them. We own a couple of the hedged ETF’s.

      Reply

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