18 December 2008

Buy the Loonie? With FXC.

While reading up on the computer-based closure of the Toronto Stock Exchange in the Globe & Mail, I spotted Goldman's call: Buy the Loonie. Key points in bold:

Buy Canada, Goldman Sachs says


Globe and Mail Update

December 17, 2008 at 4:52 PM EST

Now is a good time to buy Canadian dollars because the country's economic picture is less dire than in other Group of 10 nations, Goldman Sachs said Wednesday.

The report by the U.S.-based bank comes after the Canadian currency has tumbled 17 per cent against the U.S. dollar this year and has been little changed over the past month even as other currencies have strengthened.

"We think the Canadian dollar ... has potential to play catch up" as the U.S. currency sees broad declines, Goldman said in a note to clients.

It listed three factors for its recommendation. First, the economic picture has "deteriorated less" in Canada than in most other G10 economies, because of relatively strong consumer spending.

As well, the Canadian government continues to run a surplus, "which provides some cushion against deteriorating global credit markets."

And the banking system "appears to be in relatively good shape, in comparison with the rest of G10," the report said.

Lower commodity prices will limit gains, but much of the weakness in commodity prices is already reflected in the current level of the currency, it said.

Other currency strategists agreed that the Canadian dollar has room to strengthen. "The U.S. dollar is in a bit of a freefall and Canada has not appreciated as much as the euro, sterling or yen so I think we are seeing a catch up," said Firas Askari, head of currency trading at BMO Capital Markets.

"We are relatively better off in a couple of ways – our financial system is more sound, we don't have the same kinds of subprime problems as in the U.S. and also the huge appreciation in the housing market that happened in Ireland or Spain didn't happen here. So the bubble has less of a pop when it bursts."

The Canadian dollar strengthened to 83.56 cents (U.S.) Wednesday from the previous day's close of 83.21 cents. Mr. Askari said the currency could hit 87 cents in the weeks ahead.

With the U.S. dollar making a ZIRP sound, the Loonie looks lovely.

And as I write this, I have the late broadcast of Fast Money playing in the background, on the newly-added CNBC HD. ('Bout time, Time Warner.) As Ratigan et. al. discuss the dollar's fall, their guest suggests looking at buying dollars outside the U.S. Specifically, Canuckistan dollars, Aussie dollars, and Kiwi dollars:

[Dennis] Gartman's Currency Trade

"If you have to be long a currency, I’d get long Canada’s dollar or Australia’s or New Zealand’s dollar -- those outside the United States," counsels Gartman. "And I’d own a little gold just in case, but I would not have a speculative long position."

So how does one invest in the $CAD without making a trip to Montreal or opening a FOREX account?

An ETF, of course. FXC.

Time for some clickable charts. First up, the daily and weekly charts for FXC:

The Loonie looks overbought in the short-term, but the weekly chart shows the Canuck currency coming oot of a trough. My instinct says to favor the what the weekly chart is telling me over the daily chart's moves.

And here are the daily and weekly charts of the greenback:

A quick look at the daily dollar chart shows the ZIRP-y fall into oversold territory and a broken bullish trendline.

The weekly chart gives a better perspective. The dollar is coming off of a spike after a long bear run. With the Fed flooding the economy with freshly-printed Franklins, the dollar should continue downward, no matter the short-term technicals. Again, I'm finding the weekly chart more compelling.

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