Investment bank recommends speculating against U.S. dollar with looming election of Joe Biden as president

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      One of the most famous investment bets of all time occurred back in the early 1990s.

      Britain had just joined the European Exchange Rate Mechanism. And it promised to keep the value of the pound within a specific range of the German mark.

      U.S. hedge-fund manager George Soros didn't believe this was possible and that the pound would inevitably fall.

      So in the summer of 1992, he bet against the Bank of England, putting up a reported $1.5 billion to short-sell the British currency.

      Britain jacked up interest rates to protect the pound, but that wasn't sufficient. And Soros walked away with an estimated $1 billion when its value plummeted.

      The lesson here is that currency traders can make heaps of money if they bet right. But it's not for the faint of heart.

      Once again, currency trading is attracting more attention.

      It came after strategists at a major investment bank, Goldman Sachs, recently predicted that the almighty U.S. dollar could be ready for a tumble.

      They recommended that investors short-sell the greenback against a basket of other currencies, including the Mexican peso, South African rand, and Indian rupee.

      As well, these strategists think that the euro and Canadian and Australian dollars will fare well against the U.S. dollar.

      Why? Because Democrat Joe Biden appears to be poised to win the U.S. presidential election. They also believe that the U.S. dollar could also be hurt by the development of a COVID-19 vaccine, which could be months away.

      The Canadian dollar is now trading slightly above where it was a year ago. It's now worth US$0.7613 versus US$0.7577 on October 11, 2019.

      But as the chart below indicates, it's been a fairly wild ride over the past 12 months.

      It took a lot more Canadian currency to buy one American dollar in March than it does today.
      Bank of Canada

      On March 18, the loonie hit its low point of US$0.6898.

      That came a week after the World Health Organization declared a pandemic. It also coincided with a major drop in the stock market and crashing oil prices.

      $87 billion in oil exports last year

      In fact, the value of the Canadian dollar has been linked very closely to oil prices in recent years.

      In 2019, Canadian oil exports were valued at $87 billion, according to the federal government, at an average price of US$48.27 per barrel. More than 72 percent of this revenue was derived from heavy oils.

      That was sharply higher than the $50 billion in Canadian oil exports in 2016 when the average price was just US$33.26 per barrel. Back then, only 67 percent of the exported oil revenue came from heavy oils.

      If Canada keeps pumping fossil fuels and shipping it out of the country, investors can expect the loonie to fare well against other currencies.

      But if the bottom falls out of the oil market—just as it fell out from under the British pound in 1992—the Canadian dollar could decline precipitously.

      Perhaps over the short term, the loonie may go up. But with the growing use of renewable energy in countries around the world, the future still looks fairly bleak for Canada's high-cost heavy-oil sector.

      And if history offers any lessons, that spells bad news for the loonie over the long term, no matter what any investment strategist on Wall Street might be predicting on any given day.

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