Where does the smart loonie fly?

There’s been a lot of talk lately about the Canadian dollar hitting parity against its U.S. counterpart, and the impact that has had – and will continue to have – on the Canadian manufacturing sector.

But the rising Canadian dollar also provides an opportunity on the investment front, as the loonie can go a lot further in the U.S. now, and any recovery in the value of the greenback will juice returns.

This raises the question: Where can Canadian investors get the biggest bang for their buck? For those with patience and courage, it may not be the U.S. market.

While the U.S. dollar fell 4.9% over the course of the year, from C$1.0466 to C$0.9946, the euro dropped 11.2%, from C$1.5 to C$1.3319.

To be sure, both currencies face considerable headwinds, but there is one significant difference. The U.S. is intentionally driving its dollar down as a means of inflating away its debt, while making its exports more attractive. In theory, policymakers could reverse course and drive the greenback higher again.

The euro, on the other hand, is suffering from an unwanted crisis of confidence; policymakers may want to boost its value, but they are far less in control of the currency than their American counterparts.

Over the course of 2010, the major indices in both the U.S. and Europe posted healthy gains, which largely evaporated when the gains were converted back to the stronger Canadian dollar.

It’s a tough call, integrating currency volatility with the risks associated with the actual securities.