We’re going to look at the prospects for the Canadian loonie today. This is an important subject to us as Canadian investors, given that most of us buy stocks outside of our borders. This, due to the lack of opportunities within Canada’s relatively small capital markets. When buying stocks in USD, we are subject to either positive or negative influences by CDN/USD movements. We detract or enhance our portfolio profits depending on how our currency has fared on a relative basis. Today, we will look at some mid termed and short termed charts – along with some fundamental factors that might affect the prospects for the loonie.
To give away the conclusion – my findings suggest that the loonie is at an inflection point. Its got some positives, but also some important negatives. For this reason, I am not going to provide a hard conclusion. Instead, its important that you review these factors, and make up your own mind. All the while – watching for trend signals that I will outline. Here goes:
Technical look: First, the good news
This is a chart that I have posted many times on this blog over the past 2 decades +. This is the C$ vs the USD. Its amazing how predictive the support/resistance lines that I literally drew on the chart many years ago hold up so precisely. Note the consolidation pattern on the loonie since 2016. Support lies around $0.73, and resistance about ten cents higher at $0.83.
We’re seeing another test of that $0.73-ish zone. Beyond the 2016 oil selloff – which is always hard on the loonie, its held that support line very well. Lately, you can see a tight pattern on the chart where it is jumping up/down from support to about $0.75. Note that a substantial break of $0.73 would be bearish. True, its a smidge below that now, but not materially, as the chart shows you. The loonie is also at the bottom of its neartermed trend channel. So – technically, the stage is set for a rally. But….A failure of support here would be dire. Note the big green line at the very bottom of the chart near $0.68. That’s the next support level and target if $0.73 fails.
Let’s look at crude oil, which has close ties to the strength of our economy and out currency. Busy chart, but worth studying. Most of you know that ValueTrend has been legging back into oil stocks, having been largely (not entirely) out of the sector since early 2022. The chart below illustrates why we are carefully stepping back into the sector. Support (old resistance) comes in near $65, although some minor support comes in at the old peak in 2018. Oil is still below its 40 week SMA, so we are more focused on a trade than a trend at this point. The potential for a trade comes in as prices remain ahead of $65, and momentum indicators finish their hooking-up patterns after nearing or reaching their oversold lines. The chart shows a neartermed consolidation pattern, similar to that of the loonie. Should the consolidation pattern be successful in breaking out, first resistance of $88, then ultimate resistance of $110 are potential targets.
Technical look: The bad news
The loonie is measured against the USD, and thus will be influenced by the strength or weakness of the USD on the world stage. The greenback is measured and tracked by market participants against the basket of global currencies. The chart below shows that the USD recently broke out from a consolidation pattern ($0.92 – $100) that it had been stuck in from 2016 to 2022. As often happens, you will note the circled pullback to the neckline of the USD breakout (old resistance becomes new support – see my Online Trading Course). Its clear that this support level is valid, as we witness a successful bounce from $100. Technically, prospects look reasonably bullish for the USD right now. That, in turn, is going to pressure the loonie. So that’s the bad news.
The fate of oil prices are still in question, which is why ValueTrend is legging in slowly. However, the potential is there, which could help the loonie chart (above) hold and bounce off of support. Its early yet. Meanwhile, the USD is showing signs of strength on world markets. That’s NOT going to help the loonie. Either way – Keep in mind – a strong loonie means currency losses in your USD stocks. A weak loonie optimizes returns on your USD stocks.
The fundamental view: Loonie – bearish
“Inflation eased to 5.9% in January, reflecting lower price increases for energy, durable goods and some services. Price increases for food and shelter remain high, causing continued hardship for Canadians.” From the BOC statement released March 8. Click here to read the entire BOC statement
“The BOC has hit the hold button on overnight rates, whereas the FED is on the continued tightening path. This has put considerable stress on the interest rate differential, which now is becoming a large contributor to USDCAD moving higher and overall Loonie weakness across the board. Expect Loonie bears to take control for the time being.”- BearTraps on the Canadian dollar
Martin Pelletier wrote an article in the Financial Post recently outlining his concerns with the loonie. Specifically, he was concerned with:
- Canada’s unstable government
- The relative strength of the Canadian economy vs the USA
- The current/forward Canadian energy policy.
I’ll briefly summarize Pellettier’s three talking points, with a number of additional reflections of my own. These factors extend the risks beyond the technical factors noted above. I am a charts-first guy, so this to me is background information. But, it still matters. Lets have at it:
Pelletier noted that Canada experienced negative 1.2% (-1.2%) GDP growth to December, vs. 2.7% in the USA. Americans are more productive than Canadians – producing $73.70 in GDP/capita vs $57.24/capita in Canada. We are seeing lower GDP/capital levels than our 2010 levels. This – as you have seen with the BOC statement linked in my comments above, forces the BOC to hesitate in raising rates at the same pace as the US Fed. A rising interest rate in the US means attracting more foreign capital to their currency vs. the C$ on a relative basis. That’s loonie-bearish.
Pelletier also notes that Canadians have shorter mortgage terms than Americans, meaning they are forced to roll into higher rate commitments sooner than Americans. This pressures spending, which pressures GDP. Again, pressure against the BOC to raise rates, thus pressuring the loonie.
Energy / metals/ capital inflow
Pelletier notes that Bill C69, which introduces new regulation to materials producers will pressure a significant part of the Canadian economy. Moreover, the “transition” plans regarding our Canadian energy producers. Again, translating into less spending power, lower GDP, lower loonie.
Perhaps it is no wonder why big firms like Nordstrom and Lowes are closing Canadian shops.
Pellettier was concerned about the impact and view of international investors in committing capital to Canada. The Emergencies Act and temporary seizure of normal Canadian citizens bank accounts based on terrorist/criminal protocols created a fear reaction, and exodus of foreign capital. A new level of caution by international investors on “what could happen” to investors on the whim of the Trudeau government has been created. And now we have a connection to China with the Trudeau government.
Clearly, a lack of faith by international investors is currency-bearish.
Canada has experienced the highest emigration (residents permanently leaving for another country) since the 1970’s. Meanwhile, free states like Texas and Florida are seeing the highest immigration – many from Canada – in their history books.
Authoritative medical and freedom restrictions only recently lifted, endless ethics charges, scandals, racist acts (blackface), “groping” and now some very revealing news about a KNOWN election interference plot by China to keep Trudeau elected. As with the Emergency Act enquiry – even though the House of Commons voted in favor of a public inquiry, Trudeau instead opted to appoint his very own “special rapporteur” and Liberal-stacked committees to study the China issue. How trustworthy to global investors is a known scandal-ridden PM who can appoint his own judge and jury to investigate his transgressions?
As a 30 year specialist in Behavioral Finance (sentiment, crowd behavior, fear/greed trading patterns, etc) I consider myself fairly good at judging character. No, I’m not a psychologist. But I’ve studied and written enough about behavioral patterns to to say I have knowledge in the area. As an aside, when I hired Craig years ago, I had an independent firm give Craig AND myself an aptitude and suitability test. I like quantitative measurements, and I was curious. Not surprising, I was fairly average in most areas of math, etc. But the pattern recognition section of the tests scored extremely high. That doesn’t imply that I can read minds, but it did confirm that I’m more than OK at spotting trends, and patterns, including behavioral ones.
I saw it first: Way back in December of 2015, I wrote one of my yearly “rant” blogs. Justin Trudeau was the New Prime Minister of Canada. I expressed my belief that this new PM displayed typical signs of control, elitism, and favoritism (despite his claims of being “inclusive”). Interestingly, while most of my readers agreed with my take, many people were still fooled by his “Sunny ways” at the time – a few even sent me negative letters suggesting “How dare I criticize such a great guy?”. Well, here we are today. This letter (reader name withheld) was insightful – after I wrote a similar blog just after the SNC scandal, before the second election:
I believe Canadians should be made aware of the history of the man we’ve chosen to lead our country. Why is it we don’t have this information about our Prime Minister? Because the media has been bought and funded by the Liberal party of Canada. Case in point, the leader of the media union, Jerry Dias who represents hundreds of thousands of Canadian journalists, has announced it will campaign against the Conservatives in order to re-elect Trudeau. The truth will be hidden. You can say goodbye to any balanced reporting by the media, much like any country that has a communist regime. This blog is not hyperbole. This is the unfortunate truth and I’m hoping more Canadians will wake up and realize that if this man gets a second term, this country, that I love, will be in serious trouble. We will look back and wonder why we didn’t see this disaster coming.
Keith… Only an idiot would vote for a liberal, but you are clearly shooting yourself in the foot by getting up on your soapbox the way you do. But if it makes you feel better, go ahead. Who really cares. Just turn off the TV, fold your newspaper and enjoy life.
Dow, S&P crashed over 500 points today.
The pundits on BNN all have different views. Example, Ross H said March 8 he’s not about to sell his Agnico Eagle shares. Others say AEM has had its hey day.
Today, gold stocks stood their ground…
The energy and pipeline stocks yielding $$$ are the place to be in a down market. Not a gold bug, as the bullion pays no dividend, but markets can get ugly, as in the post Jimmy Carter years of 1981 and 20% interest rates.
Don’t expect people to “wake up” to Trudeau. There are so many people drawing a cheque from they government they would not dare speak out against him. That could cause the government cheques to stop coming in
In addition to publishing the unemployment rate they should also track number if people dependent on government.
That would be the Liberal vote count
“Trudeau government has implemented policies that encourage dependence on government—not hard work and independence”. Fraser institute 2017.
If you study the objectives of the WEF, of which Christa Freeland is a key member, (and Trudeau) — you will see that the objective is to create a new model of central governance for the world which steers away from independence of choice by individual governments and its citizens. Look at the threats to the Dutch farmers, once again. Their government are card-carrying WEF members, and the plan to eliminate nitrates, cut meat production etc. This will drastically reduce supply of key foods-country independence and free trade-many moving parts to this “Great Reset” equation.
I was wondering about your top pick ZMT.TO as it is getting crushed this week along with COPX (global copper miners ETF). I am wondering if you think this is just a normal pullback for both ETFs or whether you see anything that may tell you the top is in for both ETFs.
Answered –I always have to approve comments before posting, and so there is often up to a couple of days delay sometimes. Don’t worry, I post anything that is mature thoughtful!
Not sure if my initial post did not make it through so posting again.
I was hoping you could comment on one of your recent top picks- ETF ZMT (base metal companies)- and COPX (global copper companies ETF) both getting hammered this week. Is this just a normal correction or are there signs both the copper mining and base metal sectors have topped out?
Thanks for your thoughts,
Brian–I can answer this because I did cover it on BNN (normally don’t answer stock questions on the blog)–we originally bought ZMT in the late fall after it broke out of a double bottom consolidation pattern–neckline about $50. Since then, it has performed 2 peak/troughs of which the recent pullback seems to be holding the recent trough. The trendline so far is holding. The target, assuming it continues to hold, remains its major resistance tested early 2021, then early 2022–which is about $65. If the current trendline fails (aka a mo e below the last trough close to $53), we wait a couple more days then sell. This kind of strategy is what I covered in the Online TA course.
Hope that helps