The C$ - Sorry but it wall fall

By: Craig Read
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[ Posted On: 2007-03-12 ]

Being a Petro-Currency is not good news

Many analysts contend that with oil at $60 or thereabouts, that the C$ will float upwards and be the strongest gaining currency of the G9 nations in the coming few years. It is an interesting idea but most likely false. It is false largely because the premise that high prices will translate into a doubling or tripling of oil output in Alberta over the coming decade, and thus become a fountain of reserve currency windfall, is unfounded. It takes a long time to bring oil from discovery to retail consumption, and Canada will not replace the Middle East anytime soon as the world’s premier oil exporter. Oil is the only reason the Canadian dollar has increased in value in the past 3 years vs. the U$. However oil prices will drop and when they do the C$ will slide. [see Oil Prices will Decline]

In fact oil will drop to below $45 per barrel sometime during 2005. So a more realistic assessment of the C$ and its future would reside in looking at economic growth, job creation, and interest rate policy. Canada lags the US in economic growth, productivity growth and job creation. Coupled with a high tax, high spend regime and widespread protectionism there is not a lot to attract foreign investors outside of oil and natural gas sectors. Simply put if you want investors to invest in Canadian securities and assets the economy has to be healthier than the US economy – and it isn’t. Indeed in recent months the investment amounts in Canadian securities as fallen even as the dollar has risen – a clear indicator that better returns lie in the US or Asia.

The most important indicator outside of oil prices would be interest rates. Canadian rates are below US rates – 2.5 % vs. 3.5 % - and both rates will move up. So in the short term as the Bank of Canada raises rates from 2.5 to 3 % and US rates stay the same the C$ will appreciate as it attracts capital flows looking for returns. But as the US rates in the fall increase to 4 % and beyond, there will be a corresponding outflow from the C$ to the U$. Such an outflow coupled with the lack of enthusiasm for Canadian security buying ensures a fall in the C$’s value against the U$. The only way this will not happen is if the price of oil goes well above U$60 per barrel and stays there for an extended period of time. This is unlikely.

If someone had said 3 years ago that oil would rise from $25 per barrel to $60, which is a 140 % increase in value, and that the C$ would only rise in value 40% from 62 cents to 82 cents on the U$, most economists would have declared this to be incredibly pessimistic. Yet this 40 % increase in value, which is far below the value in the run-up of commodity prices, has occurred. It is likewise improbable that oil and the C$ will retain their lofty heights once commodity prices are realigned. Commodities are termed ‘commodities’ for the good reason that over time their value and price decline towards zero. Oil will decline and as supplies increase and demand from China and India dissipates. If the Canadian economy and interest rates are not above US levels, then the C$ will naturally fall.

[See also Oil and the C$ ]

Article Source: http://www.afroarticles.com/article-dashboard

About The Author: Craig Read -- After working for a few large IT firms, Craig Read, born in 1966, is currently an entrepreneur and Venture Capital Advisor and Managing Consultant for Wireless and Mobile technologies [including the internet] and in particular, in software applications for the Wireless or Mobile Industry. www.craigread.com/ | Resource

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