I cover the Canadian Dollar (loonie) and USD once in a while—it’s probably time I revisited the subject. When we look at the loonie, it’s not as simple as merely looking at its relationship to the USD. The relationship of the USD vs. world currencies matters, along with the relationship of the loonie to oil. I have three charts for you today surrounding those relationships. Let’s get right at it.
The loonie vs. USD
As you can see on the C$ chart below, the loonie broke its 2008 support earlier this year. Despite the near termed rally on the currency vs. the USD, it’s clearly in a downtrend. Any questions? No? Thought so. Let’s move on
The USD vs. the rest of the world
Stockcharts.com provides a chart of the USD vs a basket of predominant world currencies. I’ve shown this chart, along with the loonie chart above, many times before. Nothing has changed since my last message. The USD is stalling at exactly where I suggested it would in a blog I posted more than a year ago. At this point, the USD has some minor downside pressure that could take it to 0.93 “world currency dollars”. That’s about 3 cents – or 4% below current levels.
USD weakness, no matter how temporary, does help push the CDN dollar up on a relative basis. However, we have a unique problem here in Canada. That is, our currency is pretty tied to the price of oil (aka the “petro-currency” problem). Let’s take a look.
Oil vs. the loonie
Here’s a cool chart (well, I think it’s cool. But I’m a nerd). The red line is the Canadian dollar vs. USD. The black line is WTI crude oil – priced in USD of course. The pane below shows the mathematical correlation of the two. The path of these two price charts is tracking quite positively. In particular, the price movements of the two have been near 100% correlated since November 2014 – the only exception being last March where the correlation very briefly went to neutral. So—if you want to know how the loonie is heading, at least vs. the USD, follow oil. I recently commented on oil on this blog
My bottom line prognosis for the loonie
The big trend for the loonie is bearish. The only potential for a rescue of its bearish path is oil at this time—and remains so until that relationship changes. Oil is basing, but hasn’t proven to break out yet. If the lows just below $28 can hold for oil, that provides further evidence for a base on oil. The top of the potential base is $38. The loonie is going to fly if a breakout through $38/barrel occurs on WSI crude oil. If oil falls, you might expect the loonie to continue falling—if it bases, then the loonie might find some support. The USD by itself is neutral to short termed bearish, which provides some positive potential for stability in our dollar. But that by itself is not enough to support the Canadian dollar.
A quick note on the stock market
Jeff Saut at Raymond James notes that selling stampedes last at the most 30 days – and we’re 28 days into this one which suggests we might be close to reversal time. We’ll see.
Do you live or work near Oakville, Ontario?
Keith Richards is speaking in Oakville, Ontario for the Canadian Society of Technical Analysts
Tonight: Wednesday February 10, 2016. 7:00pm.
Admittance is free for first time CSTA attendees.
Location: Queen Elizabeth Park Community and Cultural Center -2302 Bridge Rd, Oakville ON L6L 3L5
15 Comments
Keith,
I don`t disagree. I have no doubt about the influence of the price of oil on the Cdn dollar… but I question whether it`s that simple. I like to track the $CRB, $WTIC, $copper, $CDW, and $USD on the performance chart on Stockcharts.com:
http://stockcharts.com/freecharts/perf.php?$USD,$WTIC,$CDW,$CRB,$COPPER&n=1643&O=011000
Wasn`t the FED`s low dollar policy initially responsible for all the over inflated asset classes including commodities. The global economy has not been good since 2011…The weak demand for industrial commodities is reflected in the $CRB which peaked at the beginning of 2011 and has been declining since. The $CDW has also been in a downtrend since spring 2011. This is all well before the oil price retested it`s peak and then collapsed in 2014. The oil price actually rose from 2012 to mid 2014 (roughly) but other major commodities like $Copper never broke their downtrends and neither did the $CDW. Then, Just prior to the expectation that the FED was going to raise rates, the $USD took off, only then did oil finally tank, exacerbated by the Saudi`s decision to gain back market share by increasing production to drive out weaker players (tripple whammy: US rates rising driving down commodity price, supply increasing from production, global demand decreasing due to global slowdown).
It looks like in the bigger picture (longer term), the $CDW more closely correlates to a broader basket of resources reflected by the $CRB, which makes sense since Canada is a resource based economy dependent on global demand for them, and also to it`s inverse relationship to the $USD since commodities priced in $US dollars are inversely correlated.
Very well thought out–thanks Ron
Brook Thackray in his newsletter, pointed out that Financial sector (bank mainly) should be watched as well with regard to the oil price (and therefore the $CDW). It’s interesting to add $SPTFS to the performance chart mentioned above.
(Things are getting very overstretched here. Maybe some relief coming short term. Long weekend as well.)
Ron–I will send you a PM with a correlation chart–they (banks and oil) did act with a 0.75 correlation over much of 2015, but then fell back to neutral. Over history, as you will see on the chart–its been a relatively random relationship. Unlike oil and the dollar, which you can see a clear relationship
Thanks for your insights on the loonie and the USD. Will keep my USD and not convert them back to Canadian. Jack
Can you update us on gold, Keith? I am getting bullish and that is always a bad sign 😉
Too funny!
Very overbought–yikes! Should pull back, its a sign of the massive fear out there how its risen so rapidly. But RSI is off the charts on the daily chart. It cant sustain this parabolic move too much longer without some giveback
This market is starting to look pretty scary. It’s supposed to be a seasonally strong time of year
Dave–seasonality is a statistical average. Its a tendency – subject, like all statistics, to have those “didn’t work” periods. In fact, we get strong winters and weaker summers 72% of the time since 1950. But that does imply that in about 3/10 years–it doesn’t work. Clearly–this is one of them! That doesn’t suggest you give up on seasonality. I liken it to a casino. If you could go play the one-armed bandit and know you will win 72% of the time–you would stay on that seat and never leave it –knowing you just keep feeding the machine, and you will, on every pull, have a 72% chance of winning. you still have that 28% chance of losing though–but I know you’ll stay seated despite those pulls it swallowed your money. Its a numbers game!
Hi Keith,
What are your thoughts on S&P? It seemed to put in a double bottom off 1807 area with a test there and then rally late in the session. Gold is stretched out and due for a pullback, oil looks to have put in a hammer on the daily and could bounce up a bit from here, DXY could be ready for a bit of bounce. Do you think these factors are aligning for a rally on the S&P or I am talking crazy talk? How is the smart vs dumb money scenario after todays price action. Would seem the whole world is ready for the S&P to break 1807 and plunge to 1600 and the whole world is bullish gold, so that makes me want to go long S&P but the price action is scary, scary, scary.
good instincts Jason–everything you said is true. It does look like we are ready for a rally on S&P, and probably oil too, but I’d like to give that a bit before being too confident. As far as gold–you hit it. Its mega-overbought. Time for a pullback. Having said that–it has a great chart formation aka a breakout–it will be a buy on such a pullback.
Well I was expecting a bounce on oil, but was pretty surprised at how far it rallied today! S&P rally as well, but interesting how gold has been propped up a few times now at 1232. I was hoping that level would fall with the rally in oil, S&P, and DXY. Seems this gold market just wants to consolidate and then break higher. A nice break below 1232 with price action on these other markets would have been nice. I guess we will see how things close today and next week could be interesting. Thanks for all your analysis. I find it helps a lot and is very clear. Have a great weekend.
Thanks Jason
Gold was mega overbought–more selloff needed before I’d buy–it got a bit parabolic on the daily chart
what would be the likely ceiling for loonie if oil remains in the 30-35 range?
the old support level of $0.78 would be massive resistance