Loonie tug of war

While waiting for my time to get onto the set for Bloomberg/BNN’s Market Call on Friday (link is here), I happened to catch a commentary on the Canadian dollar via a previous interview. I got to thinking that the loonie has both push and pull factors working for, and against it right now. The question is: which force will win?

On the one hand…

From a push perspective, we have a softening USD on a worldwide basis. That can only be positive for our loonie.

Also, we have what could be the beginning of a positive move on oil. Our economy is fairly influenced by the dominant energy sector in Canada. If oil shows strength, that adds to the bullish case for the loonie. The producers are showing some strength lately. The XEG chart is showing a bullish MA crossover (10 week through the 40 week SMA) but price needs to break about $9.40 to offer some potential for further upside.

Oil needs to break $65. If that happens, it may challenge the high-$70’s. Meanwhile, it looks to me like thats a triangle breakout for WTI Crude. Very encouraging.

Note the incredibly strong relationship between oil (black line) and the C$ (red line). Below is a 15 year chart – but you can look back further and see the same relationship.  The indicator below the price chart is a correlation study. You’ll note that it stays above the “0” line (middle line) the vast majority of the time. That means that the relationship between oil and the loonie is almost always positive…they move together. So watch oil when predicting the strength of the loonie. Oil leads the loonie.

On the other hand…

From a pull perspective, we have a weakening economy, and a government who has been unsupportive of the Canadian energy sector. This is a chicken-egg (which came first?) situation. Rising oil prices help Canadian producers, but that becomes a challenged relationship if they, along with Canadian consumers, are burdened by anti-pipeline, anti production, and carbon tax.

Another pull factor is the record high household debt in Canada, something that I have discussed on this blog before. The situation was also discussed on BNN on Friday. High consumer debt pressures consumer spending, job growth, and the economy. The chart below illustrates how the Americans seem to have learned from the 2008 debt recession – while Canadians clearly have not.

My opinion

As noted, I think the loonie has a strong force at each end of the rope in this tug of war. Honestly, it’s pretty hard to make any bold assertions here. The chart suggests a potentially bullish breakout from its previous downtrend. That breakout hasn’t been one with too much conviction, as witnessed in the fairly contained trading pattern. Its been hovering between $0.74 to 0.77 for a year. But, a breakout is a breakout. It just needs some follow-through to prove meaningful.

So, my vote is to assume a continuation of the lethargic / sideways pattern on the loonie for the time being. Should the BOC tighten, or if the economy shows reprise despite the impediments noted above…or should energy enjoy a very strong turnaround, I’ll have a more bullish viewpoint.