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Currency volatility returns

Sep 30, 2016
Economic Insight
Market Volatility
assante life

Market participants survived considerable bouts of volatility during the financial crisis of 2008-09 as virtually every type of security saw wide swings in value on a seemingly ongoing basis. Not surprisingly, the world’s currencies also suffered dramatic fluctuations during this period. However, since that time, the Canadian dollar has continued to experience recurring, exaggerated moves in pricing against its U.S. counterpart. For investors, a strong home currency can widen the range of options for foreign investment while a weakening currency can restrict those choices. Most would prefer to have some currency stability to aid in longer term planning, but this does not appear to be in the cards for the foreseeable future. Taking advantage of professional advice and sticking to a financial plan can help calm emotions during periods of volatility.

As can be seen in the below graph, the Canadian dollar has seen a number of cyclical moves over the past 10 years. The currency declined from just under US$0.90 in early November 1991 to a low of US$0.62 on January 21, 2002. The 28-cent move took more than a decade. By comparison, the fundamental shift away from government deficits, improved economic growth, neutral inflation and political stability here in Canada allowed the currency to rise from its all-time low to an all-time high of US$1.10 on November 7, 2007, a move of more than 48 cents in less than six years.

During the 2008-09 financial crisis, “safehaven” flows saw many panicked investors turning to U.S. dollar-denominated assets. Along with virtually every other currency, the loonie sold off, reaching a low of US$0.77 at the height of the crisis on March 9, 2009. This represented a 34-cent loss in less than a year-and-a-half. Once the broader sense of panic eased, many international market participants recognized that Canada had weathered that storm significantly better than many other nations. Once again the currency was on the upswing, peaking at US$1.06 on July 26, 2011, rising 30 cents in less than two-and-a-half years. At this juncture, some relative stability had actually been achieved. The Canadian dollar traded above par relative to its U.S. counterpart from December 2010 to September 2011, the longest stretch ever recorded. However, as commodity prices, particularly oil, came under pressure, currency weakness returned and the loonie fell from its relative peak of US$1.04 on September 14, 2012 to bottom out at US$0.68 on January 20, 2016. Surprisingly, this was weaker than the bottom seen during the crisis. This sharp decline produced an equally sharp rebound as the Canadian dollar hit US$0.80 on April 29, 2016 – a 48-cent round trip in only three-and-a-half years.

Given the influence that the U.S. economy has on our own, even anticipated differences in interest rates can have a major impact. There has been considerable speculation over the timing of the U.S. Federal Reserve’s next interest rate hike. As the speculation rises, the value of the Canadian dollar falls. For most investors, diversification is key and choosing to look outside our borders when the Canadian dollar shows relative strength can provide long-term benefits. Looking beyond the U.S. may present other opportunities as world currencies are constantly moving in different directions.

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