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I’ve clearly laid out my reasons why the U.S. dollar has rallied sharply versus most of the world’s currencies … and why it’s got a lot of room left to climb.
But in case you missed my previous analysis, here’s a recap:
- Contagion from major credit market illnesses has gone global …
- Global economies big and small are taking a hit …
- Demand for natural resources and everyday exports has shriveled up …
- Global investors are pulling capital out of riskier, foreign markets and bringing it to the U.S. …
- And demand for U.S. dollars and safer, dollar-based assets has risen.
In short, a major foreign exchange rebalance is underway.
During this rebalancing, a lot of attention was paid to the euro and the British pound. And for good reason — the values of those currencies had become especially lopsided.
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But today I want to spend a little more time talking about two currencies that haven’t been getting a lot of attention — the Canadian dollar and the Mexican Peso.
Let’s start up north …
Why the Canadian Dollar Has
Tumbled Against the Greenback
My recent short-term track record in the spot foreign exchange market is very good, but no thanks to the Canadian dollar. As I’ve often said to my son John Ross, “They don’t call it the loonie for nothin’.”
In recent months, trying to profit by trading the loonie was like trying to squeeze water from a stone. That’s because the Canadian dollar was range bound for months and never committed one way or the other.
Until August, that is! Check out this chart …
As you can see, once traders realized that the global economy wouldn’t be able to escape systemic financial troubles, they couldn’t have kept the Canadian dollar in its 7-month trading range if they tried.
So far, the sharp spike down that began at the end of September has produced a 13% drop for the loonie versus the greenback.
By now, Canada might have gotten used to the fact that times are tough in the U.S. … that Americans aren’t going to be importing as much of Canada’s paper products, chemicals, fertilizer, metals and energy.
But on top of that Canada also has to worry that its third-biggest customer won’t be buying as much of their stuff, either.
I’m talking about China.
It wasn’t long ago that many market followers believed China would be able to carry the global economy onward and upward if the U.S. economy fell mostly out of the growth equation. But in recent months that idea has been tossed clear out the window.
Prices of natural resources and commodities reflected such expectations, plummeting from multi-decade and record highs. That’s another whammy on Canada’s economy. Not only are its main trading partners demanding less, they’re paying less for what they are buying.
And in case you think the situation is any better in Mexico, let me tell you why …
Running South of the Border Might
Not Be Such a Good Idea, Either
Not long ago we constantly heard about immigrants coming up across Mexico’s northern border looking for work in the U.S. But that was when our economy was still chugging along.
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Times are very different now. There are even stories about Mexicans heading back home because jobs aren’t as easy to come by. And to the same point, immigrants still working in the U.S. have sharply cut back on the money they send home to family members.
But they may want to think twice before giving up on the U.S. and heading back for the border. Mexico’s economy is on the skids.
Similar to Canada, Mexico’s reliance on crude oil trade is wreaking havoc on the country’s economy. Revenue coming into Mexico for its oil exports has declined considerably. The volume of crude oil exports is tapering off. And the price they can charge for such exports has also dropped.
Mexico’s job market isn’t exactly welcoming, either. The unemployment rate jumped 10 basis points to 4.25% in September. A trend of migration from the U.S. back into Mexico will only exacerbate the softening employment situation.
The Mexican government says its responsible policies and an arsenal of currency reserves will keep the economy from falling into crisis mode. Their goal is to prevent civil unrest. But should the country’s plans to ward of the effects of global crisis fall short, the task may prove far tougher than they currently expect.
That is reflected in the peso’s recent action. Mexico’s currency has fallen as much as 10% vs. the U.S. dollar in just the last two weeks … and 23% since August!
Take a look at this chart and see for yourself …
The peso’s extreme weakness may surprise you. After all, the government seems to possess a strong-peso policy.
Not only are they selling U.S. dollars and buying up pesos, but they’re also trying hard not to cut interest rates, which might undermine the currency and fuel inflation.
So far, they’ve managed to keep their rate at a lofty 8.25%. However, I think Mexico will soon give in — before the end of the year, in fact — when they see just how intruding this global financial crisis will become.
What’s more, the head honcho at the Bank of Mexico has said the bank will soon stop spending its foreign reserves to prop up the peso.
In my book, that spells more potential downside for the peso.
How Can You Make Money From
Our Neighbors’ Currency Woes?
If you’re not comfortable trading in the spot foreign exchange market, then you may want to consider currency ETFs. They carry strictly limited risk … allow you to go both long and short … and they’re easily bought and sold in your regular brokerage account.
Sound good? Then consider targeting the CurrencyShares Canadian dollar Trust (FXC) and CurrencyShares Mexican peso Trust (FXM).
Keep in mind, though, that both the loonie and peso are extremely oversold right now. And I think we could see a legitimate U.S. dollar correction in the short term. That offers up two possible trades …
First, buying the Mexican peso and Canadian dollar for short-term profit as markets correct and the U.S. dollar temporarily weakens.
Second, selling short the Mexican peso and Canadian dollar, at higher, more attractive prices, once the U.S. dollar correction runs its course and the next leg of the U.S. dollar bull market begins.
Only you can decide whether these moves make sense for your individual investment strategy. But at the very least, they highlight the fact that there are still plenty of opportunities in the currency markets, no matter what is happening in the global economy.
Best wishes,
Jack
About Money and Markets
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