Quote from friendoftrend:
what is your high/low target for usd/cad and when do you see it being hit? also, what are you seeing around you in Canada regarding general economic conditions?
tembec is idling plants...any other timber related employers doing same?
Last summer, I made some money on a stock called Ainsworth, a West-Coast lumber producer. I bought at $24 and sold a few days later at $26. Today it can be had for $7, and I expect that after the 2007 annual report has come out it may become a penny stock. So that's how the lumber industry is going. (Ainsworth mainly produces OSB, which is used almost exclusively in house construction, so they've been hit hard by the US housing slowdown.) I plan to buy a few thousand shares early in 2008: as the US housing market recovers, so will lumber.
Generally the economy has been booming, especially Alberta, and the TSX-500 is near record highs like the Dow and S&P 500. But that's to be expected, given the resources boom and the recent recovery of USDCAD, which has given manufacturers a boost. A big part of our manufacturing exports is cars, though, and the US-Canadian car companies, especially GM, are in trouble.
NAFTA means foreign companies wanting to penetrate the North American market can locate in Mexico or Canada as easily as the US. Canada is obviously more expensive than Mexico, but has advantages, such as better infrastructure, less corruption and a more educated workforce. A big inducement for manufacturers to set up shop here rather than the US is free medical care: not having to buy health insurance for their employees is a big advantage, and contrary to popular perceptions, our corporate tax rates are lower (and capital gains deductions higher) than in the US. Labour costs are also a bit lower. But disadvantages are seasonal economic fluctuations due to our harsher weather (which also increases certain costs), greater distance to market, and a small, geographically-dispersed domestic market. Those are the basic reasons why our standard of living is slightly lower and our unemployment levels chronically higher than in the US.
Vulnerability to FX fluctuations doesn't help, either.
But on the whole, that's why Canadian companies are such popular M&A targets. Also, coming corrections aside, there's no doubt that the long-term direction of resource prices has to be up, and resources we got.
Anyway, back to business.
Everything that happens takes time to work its way through the system, so I'm now expecting the loonie to stay in the doldrums for a couple of months, like it did last year - with occasional excursions upwards by a couple of hundred pips, and then falling back again - but the Canadian economic news should get worse as a result, the trade deficit will continue to narrow, and I think we should break back out to 1300-1400 sometime in July. If the US goes into fullblown recession, Canadian exports will go into the tank and the loonie should drop sharply. I see us getting back to 1700-1800 by the fall and maybe hitting 1.20 by the end of the year. Recalling that at the end of the last recession it hit 1.60, it might still have lots of upside potential for 1Q08. I see the Fed easing rates later this year, to try to generate a recovery in time for the 2008 elections, but Dodge will probably follow suit, so the differential won't change. I'm not convinced that rates make all that much difference to USDCAD anyway. Whatever Bernanke does, it isn't likely to have much effect until 2Q08 - at that point we might see USDCAD max out, maybe around 1.25. After that, we're in crystal ball territory.
Incidentally, here were my predictions in May 2006, when we were last down here: I thought the 13 successive rate increases had turned the ship around and USDCAD was in recovery mode (note: 13 increases, not one or two). Also I didn't think $75 oil would last. I predicted we'd get to 1300 or maybe 1400 "soon" (in fact we got to 1400 in July), that we'd reach 1500 by the end of October (missed by 6 weeks), and 1700 by the end of the year (got there on Jan 4). However, I didn't predict this slide.
Fortunately, my risk management techniques have improved and I didn't lose my shirt. Basically I'm back to where I was mid-March, which is still about 15% up on the year. Better than I'd get in the bank, and tax free ($500k capital gains exemption for small businesses in Canada).
