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Canadian Dollar: How to make money on the increasing value of the Canadian Dollar.

Thursday, November 8, 2007

Canadian Dollar: How to make money on the increasing value of the Canadian Dollar.

The Canadian Dollar hit a 130 year high on November 7, 2007 at $1.1027 (U. S.). This new valuation of the dollar will take some getting used to. Already there have been some business outcries for the Bank of Canada to step in and lower rates to cool off the appreciating dollar. This I do not believe to be the proper course nor do I think the economic situation to be so dire.

There are a number of reasons why the Bank of Canada should not step in.

First, lowing interest rates will only cause inflation throughout the Canadian Economy. The primary responsibility of the Bank of Canada is to keep inflation reasonable stable between 1-3% a year. Currently we are sitting at 2.5% and that is exactly where we should be.

Second, suggesting that a higher Canadian dollar will cause massive job cuts is ridiculous. The unemployment rate is near record lows; talk a walk down the street in Vancouver or Calgary and you will find it impossible not to be inundated by all the help wanted ads. These jobs won’t completely dry up just because our goods have become more expensive for Americans.

Third, all the banter about cutting rates is coming from the manufacturing sector. It has been displayed overtime that situations such as a higher dollar only leads to efficiency. Either become more cost efficient at producing or you shouldn’t be producing at all. This is the type of situation that yields major innovations.

Fourth, the U.S. Dollar is depreciating relative to all major currencies. The world has become a much more global atmosphere than we have seen in the past and as a result markets are able to react much more efficiently. As a result, by lowering interest rates the Canadian Economy will not keep pace with the other major currencies.

Fifth, there is a global power shift going on. The U.S. has been the dominant economy for many decades and that is changing as economies like China, India, and even the European Union as a trading block fight to become the new dominant trading powers. While this competition occurs, Canadian exports will shift from the U.S. to these other areas.

Sixth, Canada is resource rich and Uncle Sam is hooked. Canada dominates the commodities market because it is the safest source of oil, gas, metals, energy, etc. The world sets the prices for these commodities so the United States will keep coming back to Canada to buy these inputs as the price will not be affected by a higher dollar.

How to Make Money with the Soaring Canadian Dollar:

There are a number of ways to do this and I will describe a few:

1) Simply buy in to the Canadian Economy. The simplest way and safest way to do this would be to purchase some high grade Canadian Government or Corporate Bonds. These will yield a respectable percentage, most likely between 4 and 7 percent and at the same time you may also extent your return through a tax free currency appreciation.
2) Buy the TSX index. This way you are diversified and can reap the benefits of an expanding Canadian economy. The TSX has averaged over 10% annually over the past number of decades.
3) Buy the Canadian Banks: the Banks have outperformed the market significantly over the past decade. There are a lot of smart people working at the banks and they always seem to find better investment opportunities than even a sophisticated individual. Take the old adage 2 heads are better than one and augment it to 1000 heads are better than one.
4) Buy Commodity Stocks: don’t sit on the sidelines. If commodities are hot like they are and there is a global infrastructure boom going on and increasing buy, buy, buy. Lot for the next big commodity. Currently my favorites are uranium and natural gas as both should see boom times again soon.
5) Buy Companies that service Commodity Companies: These companies experience a boom at the same time as there are more new projects to service.
6) Be a Manufacturing Vulture: look for large quality manufacturing companies that the market
has hammered as a result of the higher Canadian dollar. This is when these companies are innovative and develop better efficiencies. When they become more efficient they become more profitable and huge gains can be made.

Here is a Google Earth link to some Canadian Companies my Investment Advisor has recommended for me.
Investment Opportunities in Canada

Before making any investment decisions you should always consult with a professional to see whether the investments would be a good match for your risk preferences and overall portfolio.

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