It’s a fact that our Canadian dollar is influenced by the price of oil. Despite a favourable move by WTI crude oil recently – and potential for another dollar or two more upside for oil – the Loonie remains in a downtrend. This is unusual.
Meanwhile, I wonder how much there is left in the move for oil. Note that WTI is currently hitting its top Bollinger Band – with near-overbought levels on the momentum indicators. Technical resistance comes in somewhere near $55-although I’m not sure it will make it there. Nonetheless, rising oil should be good for a rising loonie. And yet, except for a couple of positive days late last week, we really haven’t seen our currency follow the 3 week rising path of oil.
A weakening USD vs. worldwide currencies should also be helping the loonie on a relative basis. But its not. Note the 6% decline in the USD vs. the world basket of currencies – which has not helped stabilize our dollar. I offered some insight into Canada’s plight – and why this might be happening- in a couple of blogs over the past two years – the last one being entitled “It sucks to be right“.
At ValueTrend, we attempt to achieve low volatility, consistent returns in our equity platform. As such, we pay attention to currencies and how their movements will affect our portfolios in real terms for our clients. While a falling USD and temporarily rising barrel of oil may temporarily push the loonie up a penny or two (despite minimal evidence of that occurrence thus far) – I’m hesitant to reduce our USD portfolio positions any time soon. At least, not until the trend channel noted on the chart below is broken to the upside. Given the concerns surrounding Canada’s economy I’ve outlined in the past, I’m skeptical of any meaningful breakout for our currency. I continue to target a sub- $0.70 before any meaningful bottom may be seen on the loonie.
Good article Keith – thank – you. It’s unfortunate our loonie is so weak, especially for those of us who like to travel abroad. You were right about oil topping out – looks like today was the day – sell the news with the OPEC meeting. How does one know if this is a “real turning point” where now the trend is that oil will go down for a while? And oddly enough, not sure if you noticed, but oil and gold seem to be moving together recently. You called it right a little while back noting oil and gold were moving up. Now it seems both are beginning to trend downwards. Thanks in advance for your thoughts – always appreciated!
I think that we’ll see gold march to its own drum later in the summer. I’m actually becoming interested in a gold play, although I am NOT repeat NOT into a trade yet–I suspect by the seasonal period in July or near that will be the time, but we shall see.
Oil–yup, sell the news. We sold the majority yesterday, still have 6% of the portfolio in 2 international drillers but basically we are not much exposed to that sector.
Of note–we are 33% cash right now.
Thanks for your response Keith. Nice trade on oil – perfect timing. I am considering going short on crude but with such a big move down already, am a bit hesitant. Will see what tomorrow brings.
Careful–its oversold right now–
Here are some questions in case you think others may be interested, for future blogs. Please don’t feel like you have to do one of those:
1) Is shorting HUC.TO the best way for a Canadian to to bet on oil going down?
2) I read hints that CIBC is preventing shorts to borrow their HomeCapital shares. It seems to be making shorts angry, as if I understand, it prevents the stocks from being pushed down further? Super interesting.
BTW–there may be a single inverse oil ETF by Horizons–I have not checked.