I recently saw someone on Facebook suggest that the natural exchange rate of the Canadian dollar versus the American was somewhere around 67 cents. It’s not impossible. In 2002 it hit a low of 62 cents (briefly) and flirted with that predicted rate in the mid-80s and late 90s.
Yes, there were those heady days of 2007 when it reached $1.08 on high commodity prices and hit $1.05 again not long ago during the worst days of the recent American recession — when the US dollar was down but demand for our commodities was still strong. Since then it has fallen to about 80 cents.
One American hedge fund manager has claimed that a 70 cent dollar is not only possible but inevitable. Sometime in the next five years… Such predictions don’t really mean all that much except in a self-fulfilling prophecy kind of way. Hedge funds are after all nothing but big betting pools and anyone who has played the ponies knows that if a big enough bet goes down it moves the odds.
Hedge fund managers do that — make big bets for or against stocks and then pounce when the vagaries of the market give them a little edge. They make a lot of money sometimes which gives people the idea that they must know something. But, if you watch closely, you sometimes notice that those who make huge profits one year or even three in a row, suddenly post massive losses. They get fired — though not before walking away with tens of millions in personal wealth — while the regular investor sucks up the losses.
The system continues because nobody loses everything (at least not all at once) and the promise, sometimes fulfilled, of great wealth keeps it all churning along.
Watching the stock market or the currency fluctuations can be great fun if a little addicting. They also tell you very little, except in a vague way, about what the economy is really doing. That’s because economies are far too complex to understand based on a few market indicators. Economists know this even if bankers and hedge fund managers seldom do.
I recently saw a video which provides a great insight into how the currency actually fluctuates and if you want in on the secret you can watch it here. Yup, it’s just like that.
In any case, the value of the currency is less important than one might think. Recent studies have shown that — aside from those going on vacation — a low dollar or a high one have only modest effects on most parts of the economy. Now interest rates —- which effect exchange rates — are a whole different matter.
But that’s ten minutes.