The Great Game

A number of analysts at the Canadian banks have said that they expect the loonie to stabilize or decline a bit against the US dollar. This view is probably mistaken. In fact, the loonie will probably continue to climb relative to the USD. 1.05 by the end of the year is likely and 1.20 by November 1, 2008 is entirely possible.

The majority of the movement between these two currencies is caused by change in the American dollar relative to all currencies. The immediate cause of this problem is the subprime mess and the unwinding of the property price bubble. I think neither of these two events are finished yet. Property price bubbles usually take years to wind down and the property bubble is fuelling the subprime collapse. Until the property bubble is deflated the financial mess will continue.

The bigger picture is that the current account deficit dam has broken. America's finances have been unsustainable for a number of years. Main commentators have pointed out that the current account deficit was unsustainably large. It was just a matter of time before the current account deficit would provoke at sustained decline (possibly even a precipitous decline which we have been spared to date). The signs of this adjustment abound: Countries are unpegging their currencies which is cutting demand for the American dollar, as well as Iran's decision to accept yen for oil. All of these facts point towards a sustained decline of the US dollar.

The Canadian economy is in a much better situation and is likely to remain that way for the near future. Oil, gold and wheat are all strong right now. Gold is will remain strong as long as the American economy is in decline. Wheat prices are being driven up by the biofuels movement and world wide oil production has declined from its peak in 2006. Manufacturing has been hurt by the rising dollar but job growth is strong across the country. The fact that the growth has been lead by educational services suggests that we can expect an increase in Canada's productivity in the next few years since educational services suggests grow in training.

In short there is little reason for the current trends to reverse. and at these rates we can expect the loonie reaching unheard of levels against the greenback.

Update:

I found this article that also tell how Russia, Iran and Venezuela are moving there foreign currency reserves over to Euros.

Three big oil producing nations — Iran, Venezuela and Russia — have all been moving much of their foreign currency reserves from dollars to euros in recent months.

At this point I would not want to be sitting with large amounts of US dollars.

Update II:

The Loonie hit 1.0469 USD today and we have two more months in this year.