Author Topic: CAD / USD  (Read 6202 times)

no_free_lunch

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CAD / USD
« on: January 03, 2018, 02:54:07 PM »
Okay, first off, please don't take too seriously, speculating on currencies is foolish right?  That being said I hold both CAD and USD investments and I do have to determine how to allocate new funds.  I feel I should at least consider where the currencies are at when making that decision.

The canadian dollar has had a decent rally this year, pushing up to 1.25 per USD from 1.34 a year ago.  This just seems at odds with reality.   Just a few things I can think of.

- With the change to US corporate tax rate canada is now much less competitive than it used to be for multi nationals.
- Canada's housing stock is severely over-priced.  I fear that this will ripple through and ultimately affect the currency if the government is forced to lower/sustain rates.
- In fact the bank of canada has been much slower in raising rates than the US fed.
- Trump / NAFTA...
- It seems much of the recent appreciation has been a result of higher oil prices, but how sustainable is that?  Crude output is still very high, OPEC is completely disfunctional, the US is opening up drilling, alternative energy appears unstoppable.  I have a hard time getting bullish on oil.

Just some food for thought.  I am probably going to put all new funds to non Canadian markets.  Just not sure what to do with cash, which is currently all in CAD.


bskptkl

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Re: CAD / USD
« Reply #1 on: January 03, 2018, 03:27:36 PM »
I was just thinking this through myself and ended up buying dollars today to take my cash position to 50/50 CAD/USD from 64/36.
You make good points.

Viking

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Re: CAD / USD
« Reply #2 on: January 03, 2018, 05:33:29 PM »
Nofreelunch, being a Canadian investor I have similar questions to you.

I feel that we are in a housing bubble; I live in greater Vancouver and most houses here are now valued at CAN +$1,000,000. Should the housing bubble pop there is a good chance our economy will struggle.

All of my financial assets are held in US$ accounts or hold US securities. The main reason for this is I prefer to invest in the US markets for a number of reasons (size being the main one). A secondary reason why I like my financial assets in US$ is as a hedge should the housing bubble pop and the Canadian economy tank (which would likely drop the Can$).


Uccmal

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Re: CAD / USD
« Reply #3 on: January 03, 2018, 07:55:45 PM »
Okay, first off, please don't take too seriously, speculating on currencies is foolish right?  That being said I hold both CAD and USD investments and I do have to determine how to allocate new funds.  I feel I should at least consider where the currencies are at when making that decision.

The canadian dollar has had a decent rally this year, pushing up to 1.25 per USD from 1.34 a year ago.  This just seems at odds with reality.   Just a few things I can think of.

- With the change to US corporate tax rate canada is now much less competitive than it used to be for multi nationals.
- Canada's housing stock is severely over-priced.  I fear that this will ripple through and ultimately affect the currency if the government is forced to lower/sustain rates.
- In fact the bank of canada has been much slower in raising rates than the US fed.
- Trump / NAFTA...
- It seems much of the recent appreciation has been a result of higher oil prices, but how sustainable is that?  Crude output is still very high, OPEC is completely disfunctional, the US is opening up drilling, alternative energy appears unstoppable.  I have a hard time getting bullish on oil.

Just some food for thought.  I am probably going to put all new funds to non Canadian markets.  Just not sure what to do with cash, which is currently all in CAD.

Not taking it too seriously: 
- The dems will control the House and possibly the senate in 10 months.  The tax cuts will get quietly rolled back (maybe)
- Is Canadian housing really in a bubble or have our prices just normalized to intenational levels?  Dont know the answer, but I am not convinced there is a bubble, any more than London, Paris, Tokyo, or Manhattan are in a bubble. 
- CDN. interest rates are higher than the US. last I looked. 
- Trump/Nafta:  We have professional negotiators as well in Canada.  We can tax the living daylights out of Facebook. Google, Amazon, Apple, and Netflix, and cause far more damage than softwood lumber tarrifs.  The US needs to bargain in good faith or they may find the whole world throwing tarrifs on all those lucrative tech companies.  You can be sure that the above crew has lobbyists working fulltime in DC to block the loss of Nafta and other trade agreements. 
- Oil prices could go very high.  Shale could turn out to be a disappointment.   At a certain oil price there is a US recession - the US net imports 15 M bpd.  Now of course, if the US has a recession we get one as well but highh oil prices mitigate ours a little. 

5 years ago the CDN dollar was greater than par with the US.  Playing this game could very well lose you 25%. 

There are more moving parts than we can possibly account for in these scenarios.  Right now, I see no deals on US stocks (outside the energy sector), to even be bothered with.  For the first time in my investing career of 20 plus years I hold no US companies.  When there is a major correction I have a list but right now I am sitting out the US rally. 
GARP tending toward value

ICUMD

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Re: CAD / USD
« Reply #4 on: January 03, 2018, 10:18:15 PM »
Weighing in on the debate - I'm currently at about 50-50% split CDN/US.

After not having been in a position to take advantage of the prior currency parity, I have converted CDN to USD at current exchange rates whenever I felt there was a compelling US denominated equity I wished to have.  Aside from US stocks, which I agree are overvalued for the most part, there are ADRs and foreign equities denominated in USD which seem to present more value.  I have also initiated 'small' positions in an array of US equities which I wish to add to over time based on improved valuations.  My USD equities have performed much more impressively than my CDN ones over 2017, and the selection offered in USD is the main reason why I converted so much currency.

I believe the CDN economy to be on precarious ground.  Personal debt loads for Canadians are at extreme levels (the highest of any developed nation at 168% of disposable income)  and the majority of this is due to mortgage and credit card debt.  Stock markets are also showing irrational bubbles in marijuana and crypto without regard to valuation.  The 'glue' holding this house of cards together is low interest rates (esp for mortgages).  To keep this party going, either you need to believe that the government will stop and possibly reverse course in raising interest rates (out of fear of causing a collapse), people will change behavior and spend less (doubtful) or wages will increase to keep pace (wage inflation).

I don't know what will act as a catalyst for this house of cards to fall nor when it will happen.  But I do know that people earning $100,000K /yr or less owning homes well in excess of 1 million dollars is not normal and highly risky.  It isn't so risky for the individuals (who can declare bankruptcy when underwater), but more so for the banks, debt holders and savers who may have to 'bail-in' the banks deemed too important to fail.  At some point, this debt cycle needs to unravel - and nobody has convincingly articulated how that is going to happen.
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DTEJD1997

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Re: CAD / USD
« Reply #5 on: January 03, 2018, 11:01:47 PM »
Weighing in on the debate - I'm currently at about 50-50% split CDN/US.

I don't know what will act as a catalyst for this house of cards to fall nor when it will happen.  But I do know that people earning $100,000K /yr or less owning homes well in excess of 1 million dollars is not normal and highly risky.  It isn't so risky for the individuals (who can declare bankruptcy when underwater), but more so for the banks, debt holders and savers who may have to 'bail-in' the banks deemed too important to fail.  At some point, this debt cycle needs to unravel - and nobody has convincingly articulated how that is going to happen.

How does this even happen?  I am going to presume that a person making $95k a year who owns a million+ home did it in one of two ways:

A). They bought the house some time ago (10+ years) and it has appreciated since then

B). They inherited the house

Of course, for a house to be worth a million+, there must have been some marginal buyers.  When I was growing up in the world, it was always pounded into my head that one bought a house for a MAXIMUM of three times your household income.  Of course, that was also with a substantial down payment.  So for somebody to buy a million dollar+ home, they need household income of $350K+ OR some massive liquidity OR most likely both.

I get that some people make good money, but I really have to question how many households are making $350k+ a year.  Clearly if the average house price in Toronto or Vancouver, or ANYWHERE is $1mm+, you most assuredly are in a bubble.  The average household income is nowhere near $350k.  Nor do most households have $200K+ for a down payment.

Finally, maybe things are different in Canada...but how does one even begin to LIVE in a 1mm+ house?  You are going to need furniture & such.  You probably aren't going to be outfitting a house like that at Ikea.  You are also probably going to have some $$$ for maintenance & repair.  Finally, what in the world would property taxes be on that?  1% on $1mm is $10k per year...just in property taxes!  You also have electric & heat & water & sewer & such.  A household pulling in ONLY $100k a year might wind up eating ramen noodles just to be able to stay in such a place.

At some point, I think interest rates are going to have to rise.  When that happens, look out below at housing valuations!

Viking

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Re: CAD / USD
« Reply #6 on: January 03, 2018, 11:28:33 PM »
Dtejdd1997, crazy low interest rates are, from my perspective, the primary culprit of the jump in house prices. Until just recently, it was possible to get a 5 year fixed mortgage rate under 2.75%; people are focussed on payments and not total amount of debt they are taking on. Interest rates are starting to rise. If they continue higher it is hard to see house prices staying this high. The Bank of Canada is in a very tough spot; if they follow the Fed and continue to raise interest rates they will risk a housing correction that could spread to the broader economy (given housings outsized importance).

The Can$ is currently trading at US$0.80. My guess is the Bank of Canada will be getting very nervous if the Can$ continues to strengthen in the coming year to US$0.85 or higher.

Higher interest rates and a higher Can$ in 2018? Might work if we get another commodities boom :-)

frommi

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Re: CAD / USD
« Reply #7 on: January 04, 2018, 02:39:08 AM »
I read a lot about currencies this past year and from what i now know the CAD is still a good statistical long position against the USD. Based on relative purchasing power it is undervalued by 22%, carry and term spread are pretty equal and momentum is in favor of the CAD (1m and 6m favor CAD, 3m equal). But of course all this can change tomorrow or next month and besides of the statistics i have no idea what the housing market, oil prices, the central bank or inflation does in canada in 2018.

gary17

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Re: CAD / USD
« Reply #8 on: January 04, 2018, 05:42:28 AM »
Weighing in on the debate - I'm currently at about 50-50% split CDN/US.

I don't know what will act as a catalyst for this house of cards to fall nor when it will happen.  But I do know that people earning $100,000K /yr or less owning homes well in excess of 1 million dollars is not normal and highly risky.  It isn't so risky for the individuals (who can declare bankruptcy when underwater), but more so for the banks, debt holders and savers who may have to 'bail-in' the banks deemed too important to fail.  At some point, this debt cycle needs to unravel - and nobody has convincingly articulated how that is going to happen.

How does this even happen?  I am going to presume that a person making $95k a year who owns a million+ home did it in one of two ways:

A). They bought the house some time ago (10+ years) and it has appreciated since then

B). They inherited the house

Of course, for a house to be worth a million+, there must have been some marginal buyers.  When I was growing up in the world, it was always pounded into my head that one bought a house for a MAXIMUM of three times your household income.  Of course, that was also with a substantial down payment.  So for somebody to buy a million dollar+ home, they need household income of $350K+ OR some massive liquidity OR most likely both.

I get that some people make good money, but I really have to question how many households are making $350k+ a year.  Clearly if the average house price in Toronto or Vancouver, or ANYWHERE is $1mm+, you most assuredly are in a bubble.  The average household income is nowhere near $350k.  Nor do most households have $200K+ for a down payment.

Finally, maybe things are different in Canada...but how does one even begin to LIVE in a 1mm+ house?  You are going to need furniture & such.  You probably aren't going to be outfitting a house like that at Ikea.  You are also probably going to have some $$$ for maintenance & repair.  Finally, what in the world would property taxes be on that?  1% on $1mm is $10k per year...just in property taxes!  You also have electric & heat & water & sewer & such.  A household pulling in ONLY $100k a year might wind up eating ramen noodles just to be able to stay in such a place.

At some point, I think interest rates are going to have to rise.  When that happens, look out below at housing valuations!

a lot likely had help from parents who have been in real estate in 30+ years and mortgage paid off...so there's a lot of equity  -- if they can send $ 250K to help the down payment, then all the sudden the kids can afford a $1M house with a couple / family earning roughly $ 150K ~ $ 200K.

ICUMD

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Re: CAD / USD
« Reply #9 on: January 04, 2018, 06:42:21 AM »
I had a bit of an eye opening conversation with a friend - a teacher earning ~ 75K/yr.

On the topic of investments, he told me how he had purchased multiple properties - one for rent and had recently flipped another one.  Both close to the Toronto area.

Me: So how did you manage to finance the down payments?
Reply:  Well, you can purchase with 0$ down.
Me: Really?  What lender?
Reply: Any lender?
Me:  What????

It turns out, you can 'purchase' your down payment through private lenders who will lend you $50K - $150K at 7 - 10% Interest rates. 
You lie on the mortgage application.  There are no real verifications.

Its actually genius:  if you have some (any) cash flow, you purchase multiple houses for no money down in this fashion, flip them (declare them your primary residence) and book the profits.  You can't loose - house prices go up as there is a greater fool/genius doing the same thing.  Banks appraise the homes at the higher valuation and issue larger mortgages.   And hey, if the housing market crashes - return the keys to the bank and declare bankruptcy- oops...  you still earn your $75K/yr and can afford rent/food like before.   The kicker, is the banks are doing this with the money of the savers who have deposits at the bank backed with insurance by the taxpayer.  It isn't people who purchased houses though loans from their parents or who bought 20 years ago driving up home prices, its the speculators who are flipping.  I think its the same story as the 2008 US housing bubble, except Canadians are laden with more debt than even Americans back then.

One way I see the CDN dollar possibly going up - is if there is a large burst of the credit bubble with asset price deflation, there may be a flight to currency.  All of a sudden, currency/money becomes more valuable as people sell everything - stocks, real estate, collector assets.  However, they may also fly to the USD, gold, crypto etc.  I'm just speculating...
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