Loonie for the Canadian Dollar

This past week, our Tweeter in Command, President Trump, turned his attention to Canada. Whereas in the past, getting the President’s attention wasn’t necessarily a bad thing, under the current administration it’s like having the school’s loudspeaker call you to the principal’s office after you just watched the sheriff’s car roll into the parking lot; you wish you didn’t exist.

The threats this week (at least those directed north) related to a 20% tax on lumber and the abandonment of NAFTA. This follows on the heels of a dispute over dairy products and precedes Boeing jumping on the bandwagon with claims against Bombardier for allegedly dumping aircraft on the market.

The result of this is a further weakening of the Canadian Dollar. Which is like administering yet another kick to a beaten dog for, as the chart below clearly shows, the CAD has been on a downward path for the last few years.

It seems like not so long ago that the Canadian Dollar was trading at a premium to its US counterpart. I remember a Haywood banker at that time giving me a recap on his vacation, “I bought a condo in Palm Springs…that’s what we Canadians do when the Loonie trades for over $1.”

Well, that was one heck of an investment. During the four years since the CAD traded over parity, the USD has appreciated over 25% against it. Meanwhile, real estate in the US has done nothing but soar, so hats off to all the Canadian bankers who vacation at their condos in California.

All good things must come to an end, however, as markets are nothing if not cyclical in nature. Thus, the Canadian dollar likely wouldn’t trade down forever and it certainly looked it had bottomed in 2016 and that 2017 was going to be the year it reversed course to the upside.

This apparent change in direction coincided nicely with a rally in the price of gold; which makes sense as gold is not only a contra-dollar investment but trades very closely to the Canadian dollar as their economy is very resource-centric. However, while both appeared to start an uptrend in December (timed with the Fed hike), they have recently trended apart, due in no small part to Trump’s attacks.

The above chart shows the price of gold (orange, up 10%) versus the CAD (blue, down 3%) since the first of the year. Clearly, the divergence between the two started about the time that Trump’s NAFTA rhetoric heated up.

Four reasons I like the CAD now

All of the above discusses how we got to this point where you’d have been Loonie to suggest being long the Canadian Dollar over the last few years. During that time US rates bottomed and headed higher (negative), gold traded down (negative), and now Trump is talking up trade wars (negative). So, based on that, I’m turning positive. And, there are three reasons why.

  1. The US economy will not outperform as hoped. Expectations have gotten way ahead of fundamentals. Recent economic data suggests that the recovery remains rather tepid, yet the Trump Rally has people investors seeing stars. Congress is not rolling over for his policies and I just don’t see the spark being as big as hoped for.
  2. Rates will rise slower than expected here. Based on the above argument for an economy that doesn’t beat expectations, throw in the Fed’s desire to wind down their balance sheet and you have a recipe for rate increases coming slower than forecast. The Fed has been trying to be hawkish for years, with minimal ability to raise rates. Once they start tapering the balance sheet, they will have even less ability to raise.
  3. Gold will continue to perform well. We have Europe finally picking its head up, the emerging economies are getting stronger and the USD has stopped its straight upward movement. Meanwhile, there is more money being printed than is really conceivable to the average human. All of this points to gold continuing its recent strong performance. And, therefore, the CAD acting better.
  4. Trump’s attention will soon be taken elsewhere. Seriously, I think my cat can focus for longer than he can. NAFTA is already not be dismantled, just “renegotiated”. The lumber tariffs happen every ten years or so. This will shortly be water under the bridge as Trump confronts the larger issues of passing meaningful healthcare legislation and tax reform. Plus, North Korea seems to be the next attention grabber for our President. As a result, expect the recent weakness in the CAD related to perceived trade war risk to reverse course.

The net result of all this is I’m bullish on the Canadian Dollar for both the short and longer term.

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