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The Decline of the Canadian and Australian Currencies



October 12, 2008 – Comments (7)

The US dollar has gotten extremely bullish and everything else is being dumped, including Canadian and Australian currencies. 

I am Canadian so these are things that I know about Canada.  We paid back about $100 billion of debt during this world bull market, I think one of the very few governments that actually tackled debt.  I am concerned at how quickly those numbers are turning around, but because of choices over the past 25 years, Canada is a much stronger country.  Canada's debt peaked at $563 billion and bottomed at $458, (deficit this year...)

Our population is about 33 million.

Doing a search the best I could find is that that Australia's debt is about $600 billion.  Their population is about 21 million.  So, they have 1/3rd more debt with 2/3rds the population, or twice the debt problem of Canada.

I looked previously at Australia's housing bubble.  Their housing affordability and their lending practices may have been worse than the US.  When I did a search for mortgages I got a number of sites offering up to 105% financing.  The affordability survey shows that they have a much higher percent of their population affected by housing bubble prices.  The US and Canada have significant parts of our economies that have affordable housing.

Canada got really stupid about lending as well, but not anywhere to the degree the US and Australia did.  And something that is fundamentally different about our banking system that will make it stronger long term is that they do not take on the risk of 30 year mortgages.  Generally the maximum term before refinancing is 5 years, so our rates adjust every 5 years.  This is enormously significant.  Our banking system has a turnover of mortgages every year that risk can be repriced. 

In this respect the US is screwed.

These are really important fundamental differences that I think even though there's a world of hurting right now, Canada will come out stronger.

Well, if I'm right, 2-3 years from now I'm going on a cheap Australian vacation as the Australian currency devalues relative to Canadian, and quite possibly the US dollar.  On the surface it looks to me that they potentially have double the rate of bubbled mortgages compared to the US.


7 Comments – Post Your Own

#1) On October 12, 2008 at 5:24 PM, dwot (29.73) wrote:

Oops, out a bit here, about 20% currency difference...

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#2) On October 12, 2008 at 6:06 PM, dwot (29.73) wrote:

I have been looking more and I can't find a good source to back up the link I used and from other stuff I am finding I have no idea how that $600 billion figure came about or what it includes...

I would take this post down and start over if I could.  I am just realising how much I don't like the lack of control over blog content bloggers have here.  

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#3) On October 12, 2008 at 8:32 PM, CMFSoloFool (64.12) wrote:

I thought Canada had a surplus, or at least a balanced budget for about the last 10-years. They may still  be in debt, but at least they're not borrowing uncontrolably. However, Canada's largest trade partner is USA, so Canada has to value their dollar relative to US greenbacks. A strong C$ is bad for trade.

I suspect this is a temporary bump the US dollar because people are fleeing from stocks, real estate and mutual funds into US Treasuries. I think it will fall again as the Fed tries to deal with the $700 billion bailout, the wars, the ever rising deficit, and other problems.

I'm looking at buying C$ stocks right now, particularly in the energy sector... The US demand for oil, especially with winter approaching, is not going to dry up anytime soon. Also, the temporary bump in US$ is driving oil prices down. I predict this trend will also reverse as the US$ declines, and OPEC adjusts production to keep the price up. The bottom for oil isn't likely to go below $80, and we're right around there now. So CANROYs look pretty good to me right now. 

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#4) On October 12, 2008 at 10:08 PM, dwot (29.73) wrote:

FoolSolo, "had" is the operative word....

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#5) On October 13, 2008 at 1:32 PM, degaston (< 20) wrote:

Having rates adjust every 5 years may be good for the banks. But its bad for the careful consumers who have to reprice their mortgage servicing burden so often. So rather than saying that the US is screwed you should say that the US banks are screwed and the Canadian consumers are screwed.

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#6) On October 14, 2008 at 4:22 AM, esptheory (34.31) wrote:

These are not comparable statistics; the Canadian federal debt may be around $460 billion. Successive Australian governments have had a run of budget surplus and as a result have been in the black since 2006.

A significant cause of decline in the Australian dollar may be a 1% cut in interest rates by the Federal Reserve on the seventh of October (to 6.0%) 


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#7) On October 14, 2008 at 12:05 PM, DussaultCapital (< 20) wrote:

30 year fixed rate residential mortgages don't really pose as much interest rate risk to US lenders as one might think.  This is because the average American moves every 7 years and may refinance in between keeping the interest rate risk low for lenders.  

 Loans with shorter maturities are common for commercial real estate because these properties are held for longer periods and interest rate risk needs to be managed for the lender. 

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