Is Now a Good Time to Invest in Currencies?

If you are looking to invest your money somewhere, currencies like the Euro or the U.S. dollar may not be the best option for you right now. Although currencies have always been a significant component of pension funds in countries like the U.K. and the U.S., since the market crash of 2008 currencies have had a less than stellar performance as an investment instrument. Up until the crash, a successful investment strategy was to borrow in a currency that had a low yield and use that money to invest in a currency that had a high yield. That story changed after 2008. In terms of performance, last year was perhaps as bleak as it would get for top currency indices.  Considering the debacle in which the European Union is right now, it might not come as a surprise that the Euro has been getting weaker and weaker every month for the past twelve months. Here is a chart highlighting the Euro’s performance against the Canadian dollar for the past five years:

 

 

For those Europeans who saw this coming, even as late as six months ago, a good investment strategy would have been to get into a currency future. A currency future is a futures contract to exchange one currency for another at a specified date in the future at a price (exchange rate) that is fixed on the purchase date. 

Economics 101 tells us that the above graphical trend makes European imports cheaper for Canadians and Canadian exports more expensive for Europeans. Luckily for Canada, exports make up only 29 percent of the country’s GDP. That somewhat explains why Canada’s GDP continues to grow despite the adverse global conditions. Moreover, the USD-CAD exchange rate has been hovering at around parity for almost a year now (see below). Despite Canadian exports becoming more expensive for Americans, the United States continues to be Canada’s biggest trading partner. With the Canadian dollar being as strong as it is, it would be to Canada’s advantage to form ties and trading agreements with emerging markets as opportunities for trade are aplenty across the Pacific and Atlantic oceans. 

 

Individuals looking to invest in currencies can also use the same proposed strategy on a micro level.  Analysts say pension funds are nowadays “investing in emerging market currencies, though this is currently more popular among UK funds than those in the US”.

The Bottom Line:

If you are thinking of investing in currency these days, it is much better to expand your horizons and invest in emerging market currencies rather than one of the top currency indices. In the long term this is a much better investment strategy, as returns on these sorts of currency investments are expected to be considerably high according to experts and trends. 

Ali Kazerani

Housing Bubble or No Housing Bubble? That is the Question!

These days conversations about the housing market in Toronto are almost as common as conversations about the weather amongst Torontonians. Discourse about the existence of a housing bubble and whether or not it will burst has been ongoing for quite a while now. So should we be worried? Is the market really as hot as the topic?  Will it cool down in due time or are we going to see a sudden crash? If one were to do some research on this issue he/she would find out that there is no unanimous answer to any of these questions.

“We have hit the peak in the new condo market, we are on the down side of the roller coaster,” Ben Myers, executive vice president of Urbanation Inc., a leader in condominium market research, said in a recent interview published on the Financial Post website. According to Urbanation  4,769 new condos were sold in the second quarter of 2012, down 21 per cent from the record high of 6,070 in the first quarter. Moreover, 88 per cent of the units currently being built are sold, but unsold supply set a new market high at 18,123 in the second quarter. But this reduction in sales is not just limited to the new condo market. 

Toronto recently experienced a reduction in the total number of new properties (not just condos) as well but in my opinion one should not take this as a sign of bad things to come and it would be unwise to jump to any conclusions regarding a bubble right now. The decline in sale numbers can be in part attributed to the reduced maximum amortization of new mortgages from 30 years to 25 years, a new rule set in motion by the Minister of Finance back in June. Another contributing factor is the rising credit market debt as a percentage of personal disposable income of Canadian households. 

 Low interest rates have made the cost of servicing debt remain low in recent years. In order to diminish risk of future default, the Minister of Finance placed a cap on debt payments at 39% of income, making it more difficult for Canadians with large debts to acquire a mortgage.

Despite all of this, RBC’s senior economist Robert Hogue recently stated that demand in Toronto is still in line with supply, contradicting claims that a condo bubble has emerged in the city. “To accommodate the 38,000 or so net new households it sees every year, the GTA must increasingly expand its housing stock ‘vertically,’” he said.

In my opinion, the market will cool down but this topic will definitely remain a hot one. We will see sales and prices slowly plateau and some new condo projects may get cancelled but one cannot burst a bubble that does not exist in the first place.