What's the deal with the Canada-U.S. exchange rate?

What’s the deal with the Canada-U.S. exchange rate?

By Norm Rothery on January 14, 2016
Estimated reading time: 3 minutes

The history of the low loonie plus Norm Rothery's top stock picks

Earlier this week the Canadian dollar traded below 70 cents U.S. for the first time since early 2003. The loonie has fallen significantly from where it was just a few years ago and the decline has impacted the price of imports in a big way. For instance, I was dismayed to see a bunch of celery selling for $3.99 at my local grocery store. It cost $6.99 for a sad head of cauliflower. While I probably shouldn’t complain about being able to buy fresh vegetables in the depths of winter, that’s not going to stop me. After all, prices were much lower – less than half as much in the case of cauliflower – just a few months ago. To help see what’s happening it’s useful to step back and look at where our currency has been over the long term. The graph below shows how many U.S. dollars you could buy for a Canadian dollar since the early 1950s. Just keep in mind that the dollar was linked to price of gold in the early years, which is a big reason why it traded in a tight range. History of Canadian-US exchange rates

Alas, it’s hard to say where the Canadian dollar will go from here. But currencies tend to exhibit short-term momentum, which doesn’t bode well for the immediate future of the loonie. Making matters worse, the Bank of Canada is expected to lower interest rates and the U.S. Federal Reserve is expected to raise rates in 2016. These changes could put further pressure on the dollar. After all, why stay in relatively riskier Canadian bonds when you can get better rates with U.S. bonds? More positively, the OECD estimates that the Canada dollar’s purchasing power parity is near 79 U.S. cents. You’ll remember that purchasing power parity is the exchange rate at which currencies are theoretically in equilibrium. Mind you, large deviations regularly occur and can persist for long periods in practice. (While the OECD numbers tend to be fairly stable from year to year, the latest figures are from 2014 and are a little stale.) Overall it’s shaping up to be a hard winter for Canadians and a particularly difficult one for dieters who want to load up on veggies.

Safer Canadian Dogs

Investors following the Dogs of the Dow strategy want to buy the 10 highest yielding stocks in the Dow Jones Industrial Average (DJIA), hold them for a year, and then move into the new list of top yielders. The Dogs of the TSX works the same way but swaps the DJIA for the S&P/TSX 60, which contains 60 of the largest stocks in Canada. My safer variant of the Dogs of the TSX tracks the 10 stocks in the index with the highest dividend yields provided they also pass a series of safety tests, such as having positive earnings. The idea is to weed out companies that might cut their dividends in the near term. Just be warned, it’s a task that’s easier said than done. Here’s the updated Safer Dogs of the TSX, representing the top yielders as of January 7. The list is a good starting point for those who want to put some money to work this week. Just keep in mind, the idea is to hold the stocks for at least a year after purchase – barring some calamity.

Name	Price	P/B	P/E	Earnings Yield	Dividend Yield
National Bank (NA)	$38.76	1.37	8.5	11.76%	5.57%
Bank of Nova Scotia (BNS)	$54.31	1.33	9.51	10.51%	5.16%
CIBC (CM)	$89.68	1.75	10.1	9.90%	5.13%
Shaw (SJR.B)	$23.49	2.18	13.12	7.62%	5.04%
TransCanada (TRP)	$42.94	1.8	18.12	5.52%	4.84%
BCE (BCE)	$53.88	3.76	17.72	5.64%	4.83%
TELUS (T)	$37.72	3.05	15.98	6.26%	4.67%
Bank of Montreal (BMO)	$73.52	1.31	11.14	8.98%	4.57%
Power Corp (POW)	$27.60	1.02	6.92	14.46%	4.51%
Royal Bank (RY)	$70.25	1.78	10.42	9.59%	4.50%

Notes Price: Closing price per share P/B: Price to Book Value Ratio P/E: Price to Earnings Ratio Earnings Yield: Earnings divided by Price, expressed as a percentage Dividend Yield: Expected-Annual-Dividend divided by Price, expressed as a percentage Source: Bloomberg, January 7, 2016 As always, do your due diligence before buying any stock, including those featured here. Make sure its situation hasn’t changed in some important way, read the latest press releases and regulatory filings and take special care with stocks that trade infrequently. Remember, stocks can be risky. So, be careful out there. (Norm may own shares of some, or all, of the stocks mentioned here.)

Pick Your Poison

Three Value Investors Meet in a Bar It has been a hard decade for lovers of low P/B stocks. But those who like different value ratios had a great time.