Bearish on the loonie

September 19, 201912 Comments

I follow the loonie closely for two reasons.

  1. Our ValueTrend Equity Platform is almost 1/3rd invested in US denominated equities. So a move in the loonie vs. the USD affects our performance. In fact, one of the factors that offset the good markets in the VT equity platform in 2017 was the big move by the loonie against the USD. The loonie moved from $0.72 to $0.82 in the latter half of 2017. We were some 30% exposed to USD stocks at that time. This, after we had reduced our exposure down from 40%. So 30% of our exposure was fighting a double digit percentage drawdown on the USD exchange. For this reason, we try to lighten exposure in the face of a revival in the loonie, should the charts suggest so.
  2. I am building a personal property in Florida. This ain’t no mobile home, so it’s costing me some serious USD’s. A penny move on the loonie to the upside saves me thousands of dollars – vs a move down costs me. So I want to buy USD’s when I see technical resistance points for the loonie.

As you can see, I’m motivated to make this call right for two very good reasons!!

 

Of note…

Since a late 2017 peak, the loonie has trending down. I called that peak correctly in late 2017 on this blog.  I’m still bearish on the loonie for technical, and fundamental reasons. Today, we’ll look the technical side first. Then we’ll look at a fundamental factor that adds to my bearish loonie projections. Of note: those who get offended by political commentary may not appreciate my fundamental comments. They surround government policies and the potential repercussions regarding our economy and currency.  Yes, we are coming into an election, and my timing of these thoughts – although not at all new (aka my 2017 bearish call) does tie into this election. For good reason.  I feel that the current administration and policies is harmful to our dollar, and our economy. I won’t be getting into a debate on this blog over these observations. If you are one of the remaining fans of the PM’s – I’d encourage you to just read the technical thoughts below and avoid the comments below the charts.  Or skip this blog altogether. Let’s get on with it.

The technicals: Loonie flying south

Seasonally, the C$ tends to peak in September and decline through most of the winter – where it begins to pick up steam again in the spring and summer. Jon Vialoux’ s seasonal chart illustrates this tendency. As with most seasonal tendencies, they are averages – not precise measurements. This year, the loonie had its summer rally peak in late July rather than the projected seasonal peak in September. Close enough.

After a brief lower high from an early September spike, the loonie is now well on its way to continue following the bearish trend channel noted on the chart below. Should the loonie fall to the bottom of that channel, it might target to around $0.72 in the coming months. I think that’s a real possibility. My fundamental reasoning for this thought is below.

 

The future ain’t what it used to be

Much of the following commentary was taken off of various research pieces and website articles citing the numbers. I give full credit to Diane Francis (National Post) for much of the economic comments. “Canada’s GDP grew as of July by only 0.9 per cent. By comparison, the Americans’ GDP grew by two per cent. A report said that Canada’s economy lost 24,200 “net” jobs in July, the second month in a row with job losses, and the unemployment rate rose to 5.7 per cent. But the figures are misleading. That month, 69,300 private-sector jobs were lost, and the “net” figure was derived from subtracting the creation of 17,500 public sector jobs and an increase in self-employment by 27,700.

Who counts self-employment as “jobs”? Arguably, another 27,700 self-employed people are those who have lost their jobs and hope to support themselves somehow. In August, a report said Canada “gained” 81,000 jobs, but two-thirds, or 57,200, were part-time.”

Meanwhile, household debt is the highest in the world in developed nations. Canadians are leveraged 266.5% debt / GDP. Canadian households are levered enough that a continuation of our employment realities may put pressure on the current consumption habits. A government who ignores the reality of the economics behind its largest contributor to GDP (energy!) is unlikely to improve this precarious debt and employment situation anytime soon. Unemployment problems mean debt repayment problems. A bad economy means a weak dollar. This ain’t rocket surgery.

It’s not just household debt. The government is spending its way into a precarious position as well.

No Canadian prime minister has spent more money (per person, inflation-adjusted) or accumulated more debt (per person), outside a world war or recession, than Prime Minister Trudeau,” estimated the Fraser Institute in April. Canada’s gross debt will increase this year by almost $120 billion (again, adjusted for inflation) since the previous government tabled its last budget in 2015. On a per-person basis, each Canadian has acquired $1,725 more in federal debt since Prime Minister Trudeau took office,” the think tank added.

 

Ethics matter 

Did you know that the creation of Canada’s federal office of the Conflict of Interest and Ethics Commissioner can be traced back to Prime Minister Justin Trudeau’s father, former prime minister Pierre Trudeau?

Ironically, his son is the first and only PM in Canada’s history to be charged by the Ethics Commissioner! In August, the Ethics Commissioner issued a damning report that the Prime Minister breached ethics rules by trying to suborn the legal system on behalf of SNC Lavalin. That wasn’t the first time Justin Trudeau had been charged with breaching ethics. He accepted the gifts of hospitality from the Aga Khan and the use of his private island in March and December 2016, while there were ongoing official dealings with the Aga Khan, and the Aga Khan Foundation Canada was registered to lobby his office.

Having learned from his past two ethical breaches, the PM’s office quickly and silently settled a third breach of trust when they lost the trial against Admiral Norman – something that Norman’s lawyer called “more troubling than the allegations that the Prime Minister’s Office tried to intervene in the criminal case against SNC-Lavalin.” The PM’s office covered up this third breach so efficiently and silently that most Canadians are not even aware of it. I simply cannot see how these ongoing ethical breaches can do anything but add a level of concern in the international investment community, along with our trading partners. Lack of trust in a government can pressure international trade, and ultimately our economy. It certainly cannot help.

Given that this is a financial blog, I’ll avoid discussing the “other” ethical issues surrounding the PM at this time. Nuff’ said.

Pipelines

Finally – an unfinished Trans Mountain pipeline – which you and I took off the hands of Private Corporation Kinder Morgan for a mere $4.5B.  KMI were more than willing to finish the job but for the bumbling of the government through the approval process. The project remains unsold, unresolved and a horrible investment for our CPP fund—something that still sits with me as breaking the fiduciary duty  (is our CPP there to bail out the government on bad decisions – or is it to invest in pension quality investments….?). A true representation of the issues surrounding government decisions around our energy industry, hence the challenge to our economy and dollar. And that’s just one of the challenges this government has created for this industry.

 

Conclusion

I’m bearish on the loonie for technical reasons. I’m terrified of the negative effects on the C$ chart brought on by 4 more years of taxing, spending, and ethical breaches. For this reason, I am happily long the USD and plan on adding to my USD exposure with the cash I hold in lieu of the seasonal buy period (October).

 

MoneyShow

Thanks to all who showed up at my presentation at the Moneyshow. A number of people indicated they read this blog. Nice to have you out!

12 Comments

  • Hmm interesting and I agree on your thinking … but perhaps a dilemma from an investing viewpoint for me.

    The ‘forecast’ is for the TSX to outperform the US indices over the next while … Assuming that one believes that to be the case further given that Gold is looking to move up (???) and Canadian (maybe some US) Oil Stocks are in the ‘basement’ – perhaps, on weakness, is the time to take a position. Given that one has a ‘little’ cash to deploy any thoughts on US stocks vs Cdn. stocks? Or just plain US Cash before deploying…

    I am not sure if you can respond to these thoughts but – there it is 🙂

    Bruce

    Reply
    • Bruce–sometimes we need to seperate the USD vs world basket of currencies from the CDN$ vs USD.
      The USD may decline against other currencies but not against ours. I’d suggest that the USD may be weaker possibly going further–but on a relative basis, the C$ will be weaker against it.
      So–I am a net buyer of USD stocks for the coming entry into the seasonably favorable time of the year for stocks.

      Reply
  • Unfortunately Trudeau gets a free pass with most of the media. He seems to get away with everything. He will most likely get a minority which means pipelines will never get built. Most Canadians do not realize it is the energy sector that pays for most of our programs.

    Reply
    • You get a free pass when you hand out $600MM. Additionally, that $600MM only goes to the media that he “approves”. So, a right wing media like the Rebel, is not getting any of that money $. There is now a massive financial incentive for the media to keep the Trudeau Liberals in power. Little to no chance that won’t influence the reporting.

      Reply
  • What is your opinion on REITs? Do you still hold them? Is it a good time seasonally to exit this sector?

    Reply
    • Yes I still hold them. The official date for seasonality to sell is Sept 20–but that is an average date. I am planning on exiting them in the next 1-2 weeks – they tend to hold up in higher volatility, and that is still possible into early October–so I will sell closer to the date when we want to rotate into beta (growth)

      Reply
  • I recently exited all my energy names for quick profit. Is the next trading opportunity in Feb or so?

    Reply
    • Good trade Dave. Feb is the seasonal buy period–watch the chart first, but seasonals are powerful for energy (some seasonal patterns on some sectors are less predictive whereas energy is actually fairly predictive within its seasonal patterns). again–charts matter most though!

      Reply
  • I am excited to watch your video on BNN today to hear what you say at 5PM.

    Like you, I have concurred with you in mid year, the time to buy is in the 1.28 USDCAD / 78 cents area. I am buying by journalling some gold shares from the Toronto Stock exchange to the New York stock exchange. (Norbits Gambit). So I think that is a good hedge bet. (U.S. dollar goes down in terms of Gold, however may rise in terms of CAD.) A win big or win not as big trade.

    Fundamentals aside, there is a chance though our trades do not end up working out. I follow Elliottwave analysis and will say Elliottwavetrader.net is by far the most accurate in using what’s called Fibonacci pinball. They have made very accurate calls in the past. You can look into their education to understand where they come from.

    They mention there is a U.S. dollar crash using the market as a telltale from which path it will take, either impulsive (5 waves up or down) or corrective (3 waves up or down) as humans tend to always react through greed and fear:

    Anyway here are there blog posts:

    https://www.elliottwavetrader.net/p/analysis/Setting-Up-A-U-S-Dollar-Crash-And-Metals-Rise-201912175658260.html?utm_source=twitter&utm_medium=social&utm_campaign=EWT-Avi

    Public Chart here: https://www.elliottwavetrader.net/scharts/Chart-on-US-Dollar-Index-DXY-Daily-201912151898.html

    From my view if 1.27 USDCAD or 94 on the DXY is breached, then we are most likely setting up for a dollar crash.

    On the other hand I am possibly expecting the USDCAD to find support at either 1.2830 or a little further to 1.2730 as the final support.

    Keith what level on USDCAD would you say we are wrong on expecting CAD to weaken?

    Here is the other side of the coin, an analyst who also uses Elliottwave:

    https://www.youtube.com/watch?v=rUWx46CVOTk&feature=youtu.be&t=2216&fbclid=IwAR2NPI43zBj_wItSIlCtaDVsNmm1c2dVxqDNZvJ4CHxF_XXFJgma6u0Qg3Y

    I am buying at the inflection point anyway for the sake diversifying.

    Reply
  • One more thing, on the fundamental side you may be interested in reading Lyn Alden Schwartzer’s view on the dollar. She is a very smart women who’s seeking alpha’s posts I enjoy reading.

    https://seekingalpha.com/article/4294621-crowded-trade

    Note the part: “A country can’t have growing deficits and growing debt vs GDP forever without QE, but they can do it for quite a while until a catalyst brings them to a halt.

    Ironically for the United States, a strong dollar tends to be that catalyst.”

    Research is also compelling that debt-to-GDP ratios in excess of 90% are an independent cause of slower real growth due to consumer and investor expectations of higher inflation, higher taxes, or disruptive debt defaults. At the moment the U.S. is at 105% right now nominal Debt-GDP and its expected by 2023 it will surpass 115%.
    I believe Canada is at 89% which is at the cusp where more debt does not help stimulate growth.

    From the article it does look like deficit spending looks like a real problem which is finally catching up.

    There is a lot of other factors to look forward to in the future, such as U.S. becoming the next Japan in regards to demographics. It is also possible that because of those demographics, stagflation returns in the late 2020’s early 2030’s where high inflation, high employment, no growth becomes front and center in the U.S. If that is the case I believe commodities and hard asserts will be what you want to own if you are an American citizen.

    And if oil goes up in that regard, than for the far future, the Canadian dollar seems more attractive due to its natural resources we have to offer for the rest of the world like emerging markets where the growth will be.

    These are just a few of the points I see as a counter argument on why the Loonie may eventually strengthen in the next decade.

    Reply
    • Geoff–you will like my blog – being posted today (January 2, 2020)–it presents the tug of war between postive and negative influences on the loonie–thanks for the in depth comment. Good input!

      Reply

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