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Years of near universal easy money policies led to an investment boom in
commodities, which led to overproduction that coincided with languid demand,
which led to a crash in prices, which led to a rout in commodity currencies.
Then the Fed started its cacophony about raising rates; it pulled hot
money into dollar assets, pushed up the dollar further, and left commodity
currencies twisting in the wind.
Among them, one stands out: the Canadian dollar.
The rout in commodities has ravaged Canada’s oil patch and its mining
sector. For example, home sales in Calgary, the epicenter of the oil patch,
have plunged 25% year-to-date. Canada is in one of the most magnificent
housing bubbles the world as ever seen, and when it pops in Toronto or
Vancouver, there will be fireworks. But not yet.
The economy shrank for the first five months of the year, after already
shrinking in November last year, and is likely in a technical recession (two
quarters in a row of GDP shrinkage). And the problems are spreading.
Krishen Rangasamy, a Senior Economist at Economics and Strategy,
National Bank Financial, pointed today at the business investment quagmire:
Business investment spending seems to have dried up in Canada. Trade data
shows real imports of both industrial machinery and electronic equipment fell
in Q2 at the fastest pace since the 2008/09 recession. The bad news doesn’t
end there unfortunately because a further contraction in investment is highly
likely in the second half of 2015.
Even low interest rates may not be enough to entice firms to increase
investment outlays especially when profits are declining and the growth
outlook is weakening due to persistence of depressed oil prices. The
investment decline won’t be isolated to the energy sector. Thanks to the
sinking Canadian dollar, it’s now more expensive for everybody to import
capital goods.
The report saw “plenty of downside for investment spending from here.” And
that “investment slump” would drag down economic growth this year and “for
2016 and beyond.”
But some intrepid souls see a glimmer of hope for the loonie. Commodities
have plunged so far that these intrepid souls think they won’t plunge much
more. And the loonie being a commodities currency, well, you get the idea.
One of these intrepid souls is Steve Sjuggerud. In his article, “The
World’s Most Hated Major Currency Hits an 11-Year Low,” he offers a two-part
conclusion: Part A makes total sense to me, and if I had the time, I’d do it
instantly, regardless of what I think might happen to commodities and the
loonie….
By Steve Sjuggerud, Daily Wealth:
Crashing oil prices, crashing commodity prices, and a super-strong U.S.
dollar – these three have been the trifecta of pain for the Canadian dollar
in recent years. All three of these together have pushed the Canadian dollar
to an 11-year low.
In today’s essay, I’ll show you why the Canadian dollar could bottom out
soon and start a solid rally.
Right now, “real money” traders have a massive bet against the
Canadian dollar. We can see by looking at the Commitment of Traders (COT)
report – which tracks the “real money” bets of futures traders. Today, the
COT shows traders are uniformly betting against the Canadian dollar.
This is a great contrarian sign. It shows that everyone who wants to sell
the Canadian dollar has already sold. There’s nobody left to sell.
“Real money” traders have only had a significantly larger bet than today’s
one time in the past – in early 2007. The Canadian dollar absolutely soared
right after that – from $0.85 to $1.08 in about eight months. That’s a 27%
move, a huge move in a currency!
Today, sentiment on the Canadian dollar is at the worst level in history
(according to Jason Goepfert of SentimenTrader.com, whose data go back a few decades).
That also tells me the bottom should be near.
So what’s going on? And when could the rally in the Canadian dollar start?
The Canadian dollar is known as a “commodity currency.” Its currency tends
to rise and fall with commodity prices. The problem is, everywhere you look,
commodities are crashing. The Bloomberg Commodity Index, which currently
tracks futures prices for 20 commodities, is down 62% since peaking in July
2008.
Take a look at the chart below. It shows the Canadian dollar versus
commodity prices over the past 15 years…
You can see that the Canadian dollar crashed the last two times commodity
prices peaked and began a bear market. It fell 22% from July 2008 to March
2009. And since peaking in mid-2011, the Canadian dollar is down 27%, a huge
decline for any major currency.
Canada’s currency can bottom out here, simply because there’s nobody left
to sell. However, the legitimate bottom will happen when commodity prices
finally bottom.
Since commodity prices have continued lower, the Canadian dollar has
continued lower. In short, we don’t have an uptrend in the Canadian dollar –
yet. So I’m not buying today… but the Canadian dollar will be a fantastic
opportunity when commodities rebound.
The best way to take advantage of it now is to get yourself up to
beautiful Vancouver, my favorite city in the world. I was just there for more
than a week, and I can confirm that – except for real estate – prices in U.S.
dollar terms were cheap!
So take advantage by visiting Canada while its currency is at a record
low. Then buy the Canadian dollar when the uptrend finally appears. By
Steve Sjuggerud, Daily Wealth
At first, there was hope that only Canada’s oil patch would be headed into
a recession. Now the oil patch is already there. Despite months of assurances
that the oil bust and the broader commodities rout won’t spread into the rest
of the Canadian economy, they’re now beautifully spreading into it. Read… It
Gets Ugly in Canada
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