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Canadian Stock Market Attractive Escape From Falling U.S. Dollar

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By , Associate Editor, Money Morning •

Investors are warming up to the U.S. stock market in the New Year, eager to get in on gains they missed while cautiously sitting out 2010. But anxiety hasn't totally evaporated, as fears over the declining U.S. dollar raise questions about the safety of U.S. equities.

The U.S. Federal Reserve likely will maintain interest rates near zero and continue its quantitative easing policy, contributing to the greenback's weakness.

"I fully expect the dollar to continue to disintegrate in 2011,"said Money Morning Chief Investment Strategist Keith Fitz-Gerald.

The following reader question, sent to the Money Morning Mailbag, addresses concerns over the struggling U.S. dollar and its effect on the safety of U.S. investments.

I am a Canadian who currently has over $200,000 invested in the U.S. stock market. Due to the talks of a decline in the U.S. dollar, I was wondering if I should move my investments to the Canadian markets?

If so, is now a good time to do so because of the dollar being at parity? The talk here is the Canadian dollar might reach C$1.15 to U.S.$1 - do you agree?

- Dave M.

The Canadian dollar, also known as the loonie, has been hovering around parity with the U.S. dollar, and slumped a little this week after the Bank of Canada announced it would keep its low interest rates. Canada's central bank on Tuesday said it would hold its key interest rate at 1% following a significant slowdown in economic growth.

The loonie closed Wednesday at 99.57 cents per U.S. dollar and fell as much as C$1.0031 per U.S. dollar in trading Thursday.

Analysts said the bank is hesitant to raise rates much above U.S. rates for fear the Canadian dollar will strengthen quickly against the greenback, hurting the country's export-driven recovery.

"One suspects that the [Bank of Canada] is quite pleased with the two-day rally in USD, which has seen CAD as the worst performing major currency, in part thanks to BOC's caution/dovishness,"analysts from RBC Capital Markets wrote in a report this week to investors.

Still, analysts expect the Canadian dollar to recover from its recent slip and hit highs seen earlier this month. The currency reached 98.49 cents per U.S. dollar on Jan. 12, its highest level since May 2008.

"The fundamental argument to be long Canada hasn't changed in any meaningful way,"Jack Spitz, managing director of foreign exchange at National Bank Financial in Toronto, told The Journal.

Money Morning Contributing Editor Martin Hutchinson agreed that investors should not expect a long-term slump in the Canadian dollar.

"Canadian fiscal policy has been better than that in the United States, such as having much lower deficits, and they are a resource-based economy, so I'd expect the Canadian dollar to be generally strong against the U.S. dollar,"Hutchinson said. "I don't expect the Canadian dollar to go much over $1 - maybe $1.10 at most as equilibrium is probably about 90 cents (i.e. close to our reader expecting C$1.15 = U.S.$1 - which would benefit a Canadian with U.S. investments)."

As far as moving investments out of U.S. markets to its northern neighbor, Hutchinson advised investors to look more at the companies in which they are investing than the currency valuations.

"Bottom line: The U.S. dollar may weaken a bit against the Canadian, but the performance of equity investments is likely to be a much larger factor in the overall return,"Hutchinson said.

Hutchinson highlighted the strengths of Canada's equity investments in an article last year, Investing in Canada: The World's Safest Economy. He said Canada's economic policies and natural resources offer safer opportunities for investors than many other markets.

"As well as being better balanced fiscally and monetarily than the U.S. economy, the Canadian economy has a relatively larger resources sector, a big advantage when energy and commodity prices are being propelled higher by Asian demand,"Hutchinson said.

For those interested in Canadian resource plays, Hutchinson recommended coal and copper producer Teck Resources Ltd. (NYSE: TCK; TSE: TCK.A, TCK.B), oil industry giant Suncor Energy Inc. (NYSE: SU; TSE: SU), and uranium mine operator Cameco Corp. (NYSE: CCJ; TSE: CCO).

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