# Canadian dollar strengthening



## james4beach

Ever since stocks hit their bottom in March, the CAD has been strengthening against USD. Interestingly, CAD actually tracks stocks much more closely than it tracks oil.

I didn't realize how much CAD/USD correlates with stocks until I looked at this chart. The red line is CAD, black line is S&P 500.

Curious what people think. Do you think this relationship will continue for a while? The trend appears to be: stocks up, CAD up, USD down.


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## hfp75

Can you overlay usd ?


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## james4beach

hfp75 said:


> Can you overlay usd ?


Do you mean the USD index? The USD/CAD is just the inverse of what's on the chart.

I could plot stocks vs USD index, if that's what you mean


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## james4beach

Here's the US Dollar Index (dashed blue) versus S&P 500 (black).

The US dollar is plummeting. Stocks soaring.


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## off.by.10

Seems like it might just be the general mood this year. Big scare -> rush out of stocks and to USD, which means lower CAD. Things get better -> money flows back the other way.


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## m3s

james4beach said:


> Here's the US Dollar Index (dashed blue) versus S&P 500 (black).
> 
> The US dollar is plummeting. Stocks soaring.


This was a big take away for me this year

Are stocks really up or is USD just down? Devalue the currency it's based in and it obviously costs more. Optics look great for the government

We should be measuring value with a more finite measuring stick than the USD print machine


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## james4beach

USD is plummeting again today, but it seems this time that the strength is unique to CAD. This morning there are surprisingly good job numbers in Canada and simultaneous poor job numbers in the US. The CAD rallied.

Sigh... I'm sitting on some USD that I need to convert to CAD. It seems that every day, the USD falls more. It was 1.36 in the summer and is now only 1.28.


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## Earl

Yay, this'll make shopping online cheaper.


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## AltaRed

To get a better picture, the Euro should be included in any comparison between USD and CAD.... if for no other reason to get a comparison between CAD and EUR. Sterling won't be relevant for awhile due to Brexit issues. The UK seems intent on imploding their currency.


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## OneSeat

james4beach said:


> Sigh... I'm sitting on some USD that I need to convert to CAD. It seems that every day, the USD falls more. It was 1.36 in the summer and is now only 1.28.


Be happy - last time I bought any USD it was only 98c CAD - haven't sold any since. Spent some though.
Keep a USD account - you will need it some time - winters in Palm Springs - buy more VOO.


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## Numbersman61

A timely discussion. Just sold US condo and yesterday received proceeds into my US$ bank account. Now trying to determine if US$ will continue to fall. I expect that next week I’ll convert at least half into CDN$ using Norbert’s Gambit.


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## Jimmy

I think it is the $US changes affecting US GDP. Exports - imports are part of gdp. So as $US goes down , X-I rise, gdp rises , stock market rises.


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## james4beach

Numbersman61 said:


> A timely discussion. Just sold US condo and yesterday received proceeds into my US$ bank account. Now trying to determine if US$ will continue to fall. I expect that next week I’ll convert at least half into CDN$ using Norbert’s Gambit.


I'm also thinking of converting some next week using the gambit method. I plan to use DLR and DLR.U


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## doctrine

This is a sign of US dollar weakness for sure, but could also be a sign of strengthening commodities which would be good for Canada and also increase buying of Canadian dollars. There is plenty of professional analysis that suggests there could be a massive demand for commodities as economies reopen and particularly as the world attempts to electrify. All of this is kicked off by shortages already seen in some key areas, like copper, zinc, and iron ore - we used to live in a just-in-time world, and inventories in some of these commodities is now measured in days, not weeks or months.

Just a friendly reminder for everyone that if the dollar does rise above 90 cents again, that everyone should think of buying more US dollars in particular, just like in the last currency cycle. Commodity cycles end and Canada suffers from a structural productivity gap that will see our dollar consistently drop back to 80 cents or less even if it does pop in the medium term.


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## james4beach

doctrine said:


> Just a friendly reminder for everyone that if the dollar does rise above 90 cents again, that everyone should think of buying more US dollars in particular, just like in the last currency cycle. Commodity cycles end and Canada suffers from a structural productivity gap that will see our dollar consistently drop back to 80 cents or less even if it does pop in the medium term.


The cycles do seem to just recur, repeatedly. It's interesting how stable and range-bound USD/CAD really has been in the very long term. This is 50 years between 1.0 and 1.5.

We're not close to either extreme right now. Instead we're just right at the long term average. My outlook on commodities is neutral, so I suppose my outlook on the USD should also be neutral.









Link to chart from FRED


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## Gator13

The majority of the latest bank forecast show the $C strengthening to 1.25 by Q1 of 2022.

That being said, those same bank forecasts were much more pessimistic on the $C six months ago.


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## marina628

I get paid in USD so it has been awful but I decided to buy some USD stocks and look at it as a sale .


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## Numbersman61

Completed a sizable Norbert’s Gambit trade of DLR with TD Direct. Other than a bit of a wait on the phone, the transaction was very easy since the TD representative was very knowledgeable.


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## james4beach

Numbersman61 said:


> Completed a sizable Norbert’s Gambit trade of DLR with TD Direct. Other than a bit of a wait on the phone, the transaction was very easy since the TD representative was very knowledgeable.


Interesting, so you did it all in one day with phone help?

I placed a DLR trade today but thought I had to wait 2 days for settlement before journaling the shares.


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## Numbersman61

james4beach said:


> Interesting, so you did it all in one day with phone help?
> 
> I placed a DLR trade today but thought I had to wait 2 days for settlement before journaling the shares.


Yes, after I got through to representative, process was completed in around three minutes. This was my first use of Norbert’s Gambit - the key is when phoning, select special situations on phone menu. I placed online Buy order in US$ account for DLR.U; representative then sold short in Cdn$ account identical number of DLR. Because representative placed sell order, commission was $43 - not a big deal due to size of trade.
Actually, I have used Norbert’s Gambit before but always waited for settlement date to complete deal. This was the first occasion that I did a simultaneous trade.


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## john.cray

Numbersman61 said:


> representative then sold short in Cdn$ account identical number of DLR


Does it mean that your account has to be margin/short selling type?

Did you instruct them to do the short selling or did they suggest to do this? I was under the impression from previous discussions that if you get on the phone you can ask them to journal the DLR.U to DLR immediately without having to wait for 2 days settling time. Maybe I misunderstood that. Did you ask the representative if they could do that instead of shortselling?


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## Numbersman61

I didn’t ask. My accounts are just regular cash accounts. This was the method proposed by the representative - it will be interesting to see if there are additional costs.The representative said he’d do the journal at settlement date. My Canadian cash account just shows a negative balance for the DLR securities.


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## james4beach

Numbersman61 said:


> I didn’t ask. My accounts are just regular cash accounts. This was the method proposed by the representative - it will be interesting to see if there are additional costs.The representative said he’d do the journal at settlement date. My Canadian cash account just shows a negative balance for the DLR securities.


The agents are able to place short sales in regular accounts. They can do things that we actually can't do in our own accounts.

Yes it's true that with the agent's assistance, the gambit can be done more swiftly. I am trying this one alone, which slows things down.


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## james4beach

A few months ago I observed that the Canadian dollar correlates with the S&P 500.

This still is the case. As @doctrine said, maybe it has to do with commodities. Strengthening stocks & economy --> strengthening commodities --> stronger CAD.

And conversely, I think that if stocks start falling, then CAD would fall and USD would rise. Here's what's kind of interesting about this. The following actions are implicitly saying the following:

if you sell USD (buy CAD) you are betting on stocks rising
if you buy USD (sell CAD) you are betting on stocks *falling*
(did I get this right?)

This chart shows CAD in red and the S&P 500 in black. A perfect correlation over the last year.


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## OneSeat

Faskinating! 
I think many of us sort of know this but seeing a neat sketch is very worthwhile.
Please add the SP500 in USD as well.


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## AltaRed

I tend to agree the stronger CAD relative to USD is at least partially commodity driven. Less so measured against the Euro though.

Everyone knows our GDP decline and our deficit numbers are mind numbing.


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## MrBlackhill

It's not the CAD that is strengthening, it's the USD that is weakening.

The USD index is at a 6-year low. It lost about 7% from its January 2020 level.

You see a correlation in 2020 because of the USD index. The USD index was inversely correlated to the US stock market in 2020 due to money printing used to stabilize the market.

And then, yes, there's a inverse correlation between the USD index and commodities prices, so that's why we also see a correlation with commodities.

But CAD itself hasn't strengthened. Since the pandemic, CAD has...

Gained power to USD
Gained a little bit of power to JPY
Lost power to EUR
Lost power to GBP
Lost power to CHF
Lost power to AUD


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## james4beach

@MrBlackhill some of this is a bit tricky because it will depend on the time frame. Over the last 12 months, it's true that CAD initially fell against EUR and CHF, but recently it has regained most of its losses, ending up about even vs 12 months ago.

But your comment made me realize something else. It seems that gold has really been acting in its "foreign currency" role, which is nice... this is why I like having it in my portfolio.

This chart shows gold and the CHF, both valued in CAD. As the CAD has strengthened in the last few months, both gold & CHF are rapidly declining. This correlation is stronger than I expected to see.

Also, gold is more volatile than a "stable foreign currency" like CHF. This chart doesn't show that because I gave them different scales, but in portfolio design, including gold gives you a strong response (like leverage). So instead of holding CHF, you can include a smaller amount of gold, giving you "stable foreign currency" using less capital.


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## james4beach

And for context, here are 2 year charts of CAD versus some major foreign currencies. Looks to me like "neutral" CAD strength over this 2 year timespan, maybe a bit on the weak side overall.

If you are worried about the CAD weakening or crashing, then you could hold some mix of: EUR, GBP, CHF, JPY, gold (basically what central banks do!)

As mentioned in my post above, I hold gold for this purpose.


*CAD vs Euro*










*CAD vs GBP*










*CAD vs CHF*










*CAD vs JPY*


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## doctrine

james4beach said:


> A few months ago I observed that the Canadian dollar correlates with the S&P 500.
> 
> This still is the case. As @doctrine said, maybe it has to do with commodities. Strengthening stocks & economy --> strengthening commodities --> stronger CAD.
> 
> And conversely, I think that if stocks start falling, then CAD would fall and USD would rise. Here's what's kind of interesting about this. The following actions are implicitly saying the following:
> 
> if you sell USD (buy CAD) you are betting on stocks rising
> if you buy USD (sell CAD) you are betting on stocks *falling*
> (did I get this right?)


Many factors move currencies. I think in general, what you present is the case, but especially so in a "re-flation, re-opening, inflation-commodity" type of trade environment. Some days we have that and some days we don't. The market hasn't quite figured it out. But the inflation/commodity value trade is very compelling and starting to pick up some steam.

There are massive shortages of virtually every commodity. Agri-products are another big export industry and those prices are through the roof almost universally across the board. Virtually every base material is the same. Metallurgical coal, for example, is the #1 export from BC, and those prices are strong and likely to move higher - good luck building a new coal mine even for steel making these days. Same with lumber, another big export. Oil above pre-COVID levels. Find a commodity cheaper than 2-3 years ago. It's a short list.


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## MrBlackhill

Interesting. The Dow Jones Commodity Index is at a 10-year high.


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## milhouse

Re: CAD correlation to commodities...
Scott Barlow tweets about the petroCAD:


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## Tostig

A rising Canadian dollar makes US stocks cheap(er) to purchase but tricky to sell because you not only want to make sure your US investment in USD clears your Break Even Point, you have to make sure its value in Canadian dollars hasn't gone down.


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## AltaRed

I agree one needs to recognize CAD equivalent for Schedule 3 tax purposes in non-registered accounts but one's CAD equivalent acquisition price is a past decision and a sell decision should be simply based on reasons to sell. 

Too many people let their purchase price influence sell decisions. It should never be so.


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## james4beach

This Bloomberg article says many analysts are bullish on CAD, which is already the best performing currency in 2021. CAD is the strongest among 31 major currencies.

I don't take analysts very seriously (they are very bad at predicting the future), but I thought I'd share this anyway. The article cites several CAD-bullish things:

Stronger than expected job growth in February
The strong economy might push the BoC to reduce stimulus
ING analyst thinks the BoC might even announce tapering in April
TD Securities favours CAD, and remains short EUR vs CAD
Wells Fargo analyst thinks CAD does well during this risk-on sentiment
Oil remains firm, also bullish for CAD
Also note that the US Federal Reserve has an announcement coming up on March 17, which could change the USD/CAD story.


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## james4beach

My goodness, look at the US Dollar soar today as the stock market weakened.

USD up 0.85% in a single day
Simultaneously, stocks & commodities down hard

If we actually go into risk-off mode, this is going to make people's heads spin. In that scenario I think we'd see stocks and commodities fall hard while the USD soars. Completely shattering many crowded trades.


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## OneSeat

james4beach said:


> My goodness, look at the US Dollar soar today . . . .
> . . . . . up 0.85% in a single day.


Interesting reaction - it "soared" similar amounts in late February - four times in late January - and several other times in the last 12 months.

Sure any dip could presage an impending longer term change - but let's wait and see.


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## james4beach

This decline in the USD is starting to hurt. I'm an exporter and get paid in USD.

A year ago (ignoring the market turmoil extremes) I was receiving USD and converting at 1.36 and today it's 1.23 ... that's about 10% decline in my business income.

I plan to raise my prices by 6.7% this year.


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## Mukhang pera

Me too. I get a chunk of my income from the US. Bring back Trump. The USD did very well on his watch.


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## m3s

Don't worry we just need to print more CAD to catch up


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## MrBlackhill

james4beach said:


> This decline in the USD is starting to hurt. I'm an exporter and get paid in USD.
> 
> A year ago (ignoring the market turmoil extremes) I was receiving USD and converting at 1.36 and today it's 1.23 ... that's about 10% decline in my business income.
> 
> I plan to raise my prices by 6.7% this year.


Now I understand how inflation works!


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## james4beach

MrBlackhill said:


> Now I understand how inflation works!


Yup... I am one of the (tiny) actors in the economy which is forcing prices higher for American consumers.

We're lucky that the CAD has been stable over the last few years. We are not facing these rising price pressures, like the US is right now.


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## diharv

james4beach said:


> We're lucky that the CAD has been stable over the last few years. We are not facing these rising price pressures, like the US is right now.


Haven't bought a sheet of plywood lately, have you?


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## andrewf

m3s said:


> This was a big take away for me this year
> 
> Are stocks really up or is USD just down? Devalue the currency it's based in and it obviously costs more. Optics look great for the government
> 
> We should be measuring value with a more finite measuring stick than the USD print machine


This is usual risk on/risk off performance. USD appreciates during times of market stress and retreats when risk appetite returns.


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## m3s

andrewf said:


> This is usual risk on/risk off performance. USD appreciates during times of market stress and retreats when risk appetite returns.


Nothing to see here folks


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## andrewf

Show me a log chart!


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## MrBlackhill

m3s said:


> Nothing to see here folks





andrewf said:


> Show me a log chart!


2010 to 2020 : That's x2 in 10 years
2020 to 2021 : That's x4.5 in 1 year

Everything is fine!


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## m3s

MrBlackhill said:


> Everything is fine!


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## Covariance

Commodity recovery + expectation of higher rate differential (to USD) = higher CAD. If we want to look a couple of moves down the chess board we see higher CAD choking off exports in non-resource sectors, private savings being drawn down as people emerge/spend all around the time that growing Gov't debt needs financing. MMT will be put to the test.


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