Murmuration

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  By Guest Blogger Doug Rowat

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Ever been mesmerized by a flock of birds swooping and diving in unison?

This is called murmuration, and it also relates to investing. Investors often unthinkingly move together, motivated by either fear or greed. Investors like to be part of a group, but this reflexive pack-following is usually driven by emotion, not sensible risk management. Typically, murmuration is also led by just a handful of birds who steer the flock.

In the case of the Canadian economic outlook, and particularly our dollar outlook, the leader birds right now are the media. Recent headlines have drummed up extraordinary fear that both our country and our Loonie are doomed. Headlines like this, abound:

Source: Global News

So, it’s easy to get swept up in the onslaught of negative news suggesting that our dollar will crater. And I understand the many arguments for a weaker Canadian dollar—the lack of oil-price momentum, Canada’s high household debt levels, political instability, potential Trump tariffs—the list goes on.

However, because of the widespread fear, we’ve seen a desire recently from many of our clients to make highly concentrated US-dollar wagers. That is, convert large sums of Canadian dollars to US dollars in the belief that our dollar will only get weaker. In other words, they’re ignoring concentration risk and following the flock.

It’s not the purpose of this post to forecast a CAD/USD exchange rate. Maybe oil prices will continue to drop and maybe Trump will impose 25% tariffs, spur a recession and our dollar will continue its slide. But for those investors considering making highly concentrated allocations to US dollars, let me point out the following:

1. Converting a large sum (or all) of your Canadian dollars to US dollars suggests a certain forecast. But no forecast can be certain. And currency forecasting is, notably, amongst the most difficult of all forecasting as the CAD/USD exchange rate is directionless over the long term. It’s not like an equity market, which is forgiving in that it generally steadily ascends from the lower left to the upper right. If your initial entry point is incorrect, it will likely only be incorrect briefly. To accurately forecast the CAD/USD exchange rate over the long term requires timing every peak and valley. This is one reason why we have a current CAD/USD exchange rate that is EXACTLY the same as it was during the late-1980s. If you’re wrong with a currency entry point, you can be wrong for years.
2. Give consideration to the possibility of a stronger Canadian dollar. What happens if the Trump tariffs turn out to be mostly threats? He is, after all, a president who pays close attention to US equity market direction as he views it as a scorecard for the success of his presidency. 25% tariffs likely won’t sit well with markets for long. Or what if geopolitical risks increase? Recall that the WTI oil price rose above US$120/bbl during the early stages of the Ukraine war. And at least weigh the fact that, historically, our dollar has, the vast, vast majority of the time, traded at higher levels than present:

CAD/USD: 90% of the time (green) the Loonie has traded at higher levels

Source: Trading Economics, Turner Investments. 50-year chart.

Converting a large amount of Canadian dollars also has other implications. If the funds to be converted already sit in Canadian dollars then the currency exchange is straightforward.

However, if the Canadian funds are presently invested then significant capital gains could apply. Securities have to be sold first before a conversion occurs.

The point is that no concentrated—and particularly no absolute—investment wager is ever sensible. There’s always a potential future that could easily play out contrary to the one that’s being promoted in the news.

Following the flock sometimes takes you in the right direction. Sometimes it takes you directly into the rotors of an A320.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Investment Advisor, Private Client Group, Raymond James Ltd.

Source: https://www.greaterfool.ca/2025/01/18/murmuration/