Tuesday, August 30, 2011

THe Canadian dollar



I realize that I’ve not written anything about the loonie in a while (as the CAD is affectionately known here in the great white north – because of the image of the loon on side of the dollar coin).  The reason is that the CAD “weakness” was obvious caused by oil prices falling of the cliff (correlation is around .85 – there are issues with the correlation when the CAD nears parity – one way or the other that break down the relationship).  Guess what has been happening to both oil prices and the CAD over the past few trading sessions:  You got it they’re both gone up.  The CAD was trading around parity for about a month as the perception of the U.S. economy was the recession was at the door step.
 
The only thing that has changed (aside from higher oil prices – although not NatGas prices) is the Jackson Hole last week, where the Fed Chairman’s “non” statement was perceived by everyone as a sign that things were going their way (what ever way that was – those who saw positive sign of QE3 and those who saw no sign of QE3 both started buying stocks – and gold by the way).

Note that as far as I am concerned the difficulties faced by the American economy (Canada’s No 1 export market) have not subsided.  In fact, virtually all indicators are saying the same thing – the U.S. is in for a rough second half (not that the first was so much fun).  Virtually all metrics are down – and some are down by historically wide margins (today it was consumer confidence – biggest monthly drop – ever). 

This should mean that the CAD recent strength will reverse soon, which every Canadian economist is expecting, because if American (and Europe is in even worse shape by the way) then demand for oil will drop – yes emerging economies account for 50% of all oil demand (up from 20% a decade ago), but it remains that if Europe and America face a recession – and I really don’t see much hope for strong growth – as all G7 governments tighten at the same time, then demand for oil will fall.  Canada a maker of raw material (including oil obviously) – is a second degree casualty of the America’s slowdown (BTW my best case scenario for both America and Europe is tepid growth of 1% to 1.5% going forward as the deleveraging continues its inexorable path – only slowed down by the 2010 QE2 stimuli).

So back to Canada, right now oil prices WTI are back up around $87bbl ($89/bbl as I write), down from the nose bleed $110 it May 2011 (BTW CAD was trading at 1.05/95 then) today its around 1.02/98, back from parity 1.001/.999 just 10 days ago.  My guess is that with a Q4/2011 “expected” cut in the BoC’s director interest rates we can expect the CAD to trade at or below parity by the end of 2011 (I could be wrong in timing but not direction).

As a side note, Canada’s oft mentioned “cousin” on this blog, Australia is starting to see some rather unpleasant effect of the Chinese “slow down” with house prices coming under pressure (after nearly two decades of mind numbing price rises – Australia’s house price index is around 550, about 200 for the US and 155 for Canada – assuming a start date of 1987 for all three markets).

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