Don’t get too excited about the strength in the loonie

Let’s start out this blog with my concluding statement. That is, the recent rise in the loonie will likely not last for too much longer. Here’s why:

 

The big picture

I think that this chart tells the story. The loonie is in a dominant downtrend. During any downtrend, including this one, you get counter – trend movements (i.e. upswings). You’d need a pretty significant pop on the loonie to break the current downtrend. The CDN $ will need to break the last high of $0.76 USD and then take out the last major high of ) $0.79 USD  to qualify for my trend change rule of “a high that takes out the last prior high”. It would have to stay above that major high, and above the 200 day MA for 3 weeks to tweak my interest. Bottom line- this chart tells us that – at this point – the trend is not your friend if you are long the loonie.

Chart showing long-term downtrend of Canadian Loonie

Neartermed view

Now let’s look at the near termed picture. After applying my neartermed timing chart – I noted that the loonie is well over its upper Bollinger Band, and is into the overbought zones on both the RSI (intermediate termed) and stochastics (neartermed) momentum indicators. Neither has hooked down. It’s inevitable when you get a high reading on these indicators that you will get a neartermed pullback sooner rather than later.

Short term chart of Loonie showing Bollinger Bands, RSI, and Stochastics - suggests near-termed pullback may occur

A range bound price for oil

Until oil breaks out of its rather contained $42-$55 range, we shouldn’t expect too much out of the loonie. As I’ve noted in past blogs, the relationship is tight. See the chart on the bottom of this blog

There is no doubt in my mind that oil will break out eventually—but it may be a few years. Whatever the time it takes, that day is not here yet.

WTI Crude monthly chart showing oil stuck in a trading range - not a bullish inidicator for the loonie

A risky strategy

“The danger in the current climate is that we (Canada) focus on wealth distribution and not wealth creation. Both are absolutely critical, but without growth we will have no wealth created to fairly distribute.”

Rio Tinto CEO Jean-Sebastien Jacques

Canadians and Canadian businesses who create the wealth, create the jobs, and thus create GDP are being pressured through higher taxes, changes to the employment act, increasing minimum wage (Ontario), and increasing public service costs. This is the essence of Mr. Jacques message, above.

Adding to the debt are unionized corporate bailouts and gifts to Ford, GM, and foreign country “gifts” (Africa and Italy most recently). US government and Boeing have legitimately expressed concerns re the recent Canadian taxpayer funded subsidies to Bombardier.

Independent analysis confirms this view

As Alexandre Laurin Research Director of CD Howe Institute said in an interview last year “Trudeau took out the credit card and spent. But is this really affordable? Its endless deficits. It’s probably not affordable. Something will have to be done at some point. The minister will have to put his credit card back in his pocket and start paying back. If there’s not a huge, surprising growth in the economy…then we will have to pay for this. How are we going to pay for this? Through tax increases and cuts in spending – spending we have become accustomed to. So it’s going to be painful”.

As I noted in a past blog, TD Bank has forecast that Ottawa Is headed for a $150B deficit over next 5 years! I’ve also quoted ACG Analytics Research and their bearish view on the Canadian markets here.

Non of these institutes are known to be extremists, nor are they considered overly politically polarized when presenting any countries outlook. I consider them fairly unbiased in their analysis towards our market. So its worth heeding their words.

It seems that at least one pickup truck driver in Barrie shares a similar view, but puts his / her concerns out there a little more bluntly:

 

Given the longer termed trend, the shorter termed technical picture, and the concerns of highly respected independent research firms like CD Howe Institute, TD Bank and ACG Analytics –I’d probably not bet the farm on an ongoing rally for the loonie.

 

11 Comments

  • I love the quote from Jaques (may I use it?). This expresses exactly my concerns about the ludicrous NDP/Green coalition here in BC. Cancel every project. They must think the Lord will provide.

    Reply
    • My brother lives there and he tells me that there is literally no PC representation in BC. I guess that’s why they call it the “Left Coast”.

      Reply
  • Amen to that. The problem is we are preaching to the converted. However, my young daughter in university thinks its great the minimum wage is going to $14 then $15 next year in Ontario. I asked if her intention is to stay on minimum wage after she graduates. Not. As a self employed professional, it takes a few weeks each summer for me to deprogram the left wing dogma she receives from her University Profs.

    Reply
  • “Falling commodity prices are a big reason why inflation is so low. CRB index to lowest level in more than a year”. (John Murphy, Stockcharts, 16/06/2017)

    By the way,If canadian Goverment is heading for a $150 b. deficit, what will they sell this time to get rid of it? They already sold all crown corporations in the past!

    Good day

    Reply
    • As Mr. Laurin said: “How are we going to pay for this? Through tax increases and cuts in spending”

      Reply
  • Good points Keith , l was puzzled by loonie jump over last week or so
    And oil was on the way down too.
    What’s you forecast for loonie over next year or so ?

    Reply
    • Technical support comes in at around $0.70, so that might be a reasonable target.

      Reply
  • This is a one sided blog. It does not address our (un)free trade deals nor the financial engineering happening in the corporate world. I am a tradesman with qualifications in two trades. I will put my skills, intellect and ambition against anyone in the whole world. I can not compete with imports that priced for only the cost of materials here. It is not serving the slave labour countries well either. Companies are investing in share buybacks instead of capital expenditures. Some productivity choices management makes are on the level of why drive to Toronto when you can walk, Some of the equipment is just plain junk and financial management folks expect it to work like new. Your neighbourhood is getting the reputation of China north for its labour practices.

    Reply
    • Thanks for that insight Bert.
      although I cant help but see the problems behind government spending of taxpayer money and delve it as they please to buy votes. This type of spending is not conducive to building an economy, and like it or not, it must be paid back. We shall see, but my bet is that Canada will continue to underperform world markets. I made this claim 2 years ago (suggesting the TSX might even be trapped at or near 15,500 for some time). Big money will flow where opportunity looks best – the charts tell us that it isn’t here right now. I’d be willing to bet that we can have this conversation in another 2 years, and the tSX will have been again been an underperformer vs. other developing nations.

      Reply
  • Add to your list of hurdles for business and individuals… power prices in Ontario and ridiculous real estate prices. Just visited the Hamilton-Brantford area. A cousin in a rural area pays $600 monthly for power. What must businesses be paying. She travels a lot thru central Ontario and sees the blight of countless windmills with their accompanying noise and health problems not to mention their ugliness.
    Also, a large home on a rural acreage near Ancaster sold 5 yrs ago for $800,000 and now is listed for $1,900,000!!

    Reply
    • Yes the real estate market is not leaving much on the table for gains right now. There comes a point where the banks cannot mortgage a house for the majority of would-be buyers if prices get to high – no matter how low rates are. That day, whenever it may be, will be an awakening. Prices will go up until the last guy has bought or – CAN buy…
      We own a cottage in the Near North of Ontario. This is a cottage – recreational only. You really don’t want to use it for more than probably 12 weeks all-in per year. And its apparently been assessed at $800k. We built it for about 1/3rd of that price 10 years ago. This is not somewhere people can live and commute to work-its in the boonies far away from most industry and civilization-yet its worth $800k ??? I wouldn’t pay that if I was looking for a cottage. Who except the very rich can buy a recreational property for the better part of a million dollars? To me, this is yet another sign that real estate is on the cusp of pricing itself out…
      It feels like 2007 in the USA….

      Reply

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