Problems in the Canadian economy are growing and whispers of an economic slowdown are looming in the air. If an economic slowdown does occur, the Canadian dollar will be the primary victim—and investors can profit heavily from this scenario.
The central bank of the country isn’t very optimistic about the growth. Commenting on the country’s first-quarter growth, the governor of the Bank of Canada, Stephen Poloz, said, “What we have seen is that the numbers in the first quarter have been a little shy of what we were expecting.” He added, “It’s easy to point to the weather as a qualitative explainer, but it is hard for us to believe that all of that is just that.” (Source: Woodbury, R., “UPDATE 3-Canada’s Poloz sees a future of slower growth, low rates,” Reuters, March 18, 2014.)
The Bank of Canada lowered its growth estimates from what it originally anticipated. It now expects the Canadian economy to grow at an annualized pace of 2.5% in the first quarter compared to the 2.9% it predicted in December.
The Bank of Canada isn’t the only place that is suggesting the Canadian economy is headed towards an economic slowdown.
The companies traded on Canadian stock exchanges are warning about an economic slowdown, too. We can tell this by looking at their corporate earnings. If their profits start to show troubles, then it means the overall economy may be slowing. Consider this: in the fourth quarter of 2013, 60% of all the companies on the Toronto Stock Exchange (TSX) missed their earnings expectations. (Source: Shmuel, J., “Why is the TSX rallying even as Canadian companies suffer?” Financial Post, March 20, 2014.) The fourth-quarter corporate earnings season for Canadian companies was one of the worst in about a decade.
Another problem that could escalate the economic slowdown in the Canadian economy is lower natural resource prices. Canada is known to have one of the best deposits of natural resources in the world. Currently, due to fears about the economic slowdown in the Chinese economy, natural resource prices have come down. (Just consider the recent collapse in copper prices, for example.)
If the economic slowdown in the Canadian economy picks up strength, then the Canadian dollar will be in trouble. We have been seeing it decline for some time now and have been reporting it in these pages, as well. Please take a look at the chart below.
Chart courtesy of www.StockCharts.com
Over the past year, the Canadian dollar has been making lower lows—it’s in a downtrend. Recently, it broke below a very critical level of 90 (as marked by the red horizontal line in the chart above). We could see it go lower, because the momentum looks to be in favor of the bears and the data suggesting further economic slowdown aren’t helping the dollar’s cause, either.
Investors looking to take advantage of the situation that the Canadian dollar is presenting may want to do so by shorting exchange-traded funds (ETFs) like CurrencyShares Canadian Dollar Trust (NYSEArca/FXC). This ETF moves in line with the Canadian dollar; by shorting it, investors profit from the Canadian dollar’s decline.
How to Profit from This Declining Currency