Larry Berman Sees Potential in Undervalued Canadian Dollar
Financial expert Larry Berman has shared his outlook on the Canadian economy and the Canadian dollar, suggesting that recent shifts in policy may present new opportunities. For nearly a decade, Canada's economy has faced challenges tied to federal policy decisions, but Berman notes that this trend may be reversing. The Canadian dollar's value has historically been influenced by crude oil prices and interest rate differentials. While crude oil (represented by a pink line in the discussion) was once a major driver of Canada's trade balance, recent years have shown a lower correlation with oil and a rising correlation with interest rate differentials.
The Canadian dollar has been undervalued due to several factors, including separatist movements in Quebec and Alberta, trade uncertainties with the United States, and lingering economic weaknesses. Despite these challenges, Berman believes that most of these issues will become clearer in the coming months, creating an opportunity for investors. He estimates the fair value of the Canadian dollar to be closer to 80 cents USD rather than its current level around 70 cents USD.
For Canadians, the weakened Canadian dollar has actually boosted returns on unhedged investments like the S&P 500 (represented by the ticker ZSP), compared to its hedged counterpart (ZUE). However, Berman advises considering hedging currency exposure for international investment portfolios, especially in retirement accounts where trading doesn't incur tax consequences. The cost of hedging is currently about 140 basis points per year, and the strategy could outperform if the Canadian dollar strengthens more than 1.4% against the U.S. dollar within a year.
Berman suggests that for international investors, Canada may start to look like an attractive option compared to the U.S., given improving federal policy intentions. However, he cautions that scenarios where the Canadian dollar continues to weaken are still possible, particularly if trade deals collapse or separatist movements gain traction.