They must be loonie!

The chart below, which I have posted on this blog before, shows you a trading zone that the loonie gets stuck in once in a while. Take a look at the adherence of that trading zone by the loonie after the 2008/9 crash, again in 2015, and again since July of last year.

It likes to reside in the $0.77/78 (ish) area at the low end, and go up to $0.83 (ish) area at the high end. If that zone breaks (up or down) then the loonie tends to move aggressively in the direction of the breakout. Right now it is flirting with $0.77-0.78, which is right at the bottom of the trading range. If that holds—we can expect a move back up to the low 0.80’s. If it breaks down below $0.77, look for $0.74 or so.

 

The C$ and oil

Approximately 14% of Canada’s GDP comes directly or indirectly from the energy industry. This means oil/gas exploration, production. Add to that other industries affected by the industry like Canadian banks (loaners), the transport industries (rail, pipeline, etc) as well as distribution. It’s a huge part of the Canadian economy. Thus, the C$ is influenced by the price of oil. Seasonally, oil tends to do well from this time of the year until the spring. That usually helps the loonie. It may again this year.

Against that is the anti-business policies of Canada’s extreme left wing governments (provincially, federally). Carbon taxes, corporate tax pressure, and new employment law makes new investment difficult. For example, the biggest oil company in Canada, Suncor, recently announced that government pressures have forced them to sideline new investments/projects for the foreseeable future. This means that despite a potentially rising price of oil, our major producers are not going to invest in as many projects, and our economy may be isolated from what is usually a Canada – positive development (rising energy prices). So…that can translate into a lower loonie.

 

Factors for – and against – the loonie

  • For: The chart says the loonie could bounce from current levels by about 5-8%. That’s good for the loonie.
  • For: The pricing on oil often rises between Feb – early summer (increased usage in the summer creates stockpiling by producers pushing oil up into the spring). Normally, this is positive to the loonie given our exposure to oil as an economy (aka the famed “petro-loonie” nickname). Hence, the positive seasonality for the loonie that coincides with oil seasonality chart.

  • For: The oil chart itself is positive – above.
  • Against: The Canadian energy business is not on a level playing field with the other oil producing countries – given government policy (see the Suncor article link above). Rising oil prices may not help our currency as much as it normally would. Further, our Canadian oil is of lower quality than WTIC, and fetches a lower price- which can leave a little less spread for the Canadian industry vs. WTIC.

 

Strategy

I am in need of US dollars as I look to build a house in the USA in the coming year or two. Perhaps some of you are in similar need of making a decision surrounding the conversion of a larger chunk of CDN dollars into USD’s.

What I did was convert/ buy about 20% of my desired position into USD’s a couple of months ago at a bit over $0.80. If the loonie can maintain its trading range (per the chart), you will see it get into the low 0.80’s again.

If I were just now considering a conversion, I would take my chances and hold out until the spring. Yes, the loonie might break support – that is the risk we take by not converting today. Seasonal and oil chart patterns offer some hope for the loonie – despite unfavorable Federal and Provincial policies. The seasonal factors may help us see a few pennies to the upside in the nearterm. Should the loonie get anywhere above $0.80, consider converting capital to USD’s. I will convert more if/as/when we see a move to or over $0.80. If not, I would expect a freefall back to the low $070’s.

The longer termed outlook with Canada’s rising deficits and unfriendly business environment will likely cause a break in the loonie into the low $0.70’s at some point in the near future.

8 Comments

  • Boy, currency can be dramatic!
    I bought a hedged US Banks ETF when our dollar was higher but wondering about reducing and finding something unhedged.
    It’s hard to have confidence in this government doing-right for business. Another potential impact is our personal debt issue raising red flags for our banks. The US Financial TV stations are signaling us out for this.

    Reply
    • Vallie–despite the reasonable potential for a neartermed bit of strength in the loonie, the big trend – as seen on the chart – is negative. Hard to tell what happens over the next 2-3 months for the loonie, but to your point, my outlook is for longer termed weakness on the currency. The chart and the fundamentals do not signal much to be bullish about in Canada.
      And yes, I agree…. put a liberal arts graduate living off a trust fund with no prior full-time job experience or any background in economics in charge of the country, and this is what you get….

      Reply
  • 1) CANADA’S DEFICIT REDUCTION PLAN IN LAST BUDGET OR THE LACK OF IT.
    2 )REACTION OF D.B.R.S., MOODY’S OR STANDARD&POOR’S TO THE GOVERNMENT DEFICIT.
    3 )U.S. TARIFF SCHEDULE POLICY FOR CANADA AND TRUMP’S CHANGING MIND.
    4 )N.A.F.T.A. NEGOCIATION OR RE-NEGOCIATION FOR CANADA.

    ALL IN A DAY’S WORK FOR CANADIAN ECONOMY AND THE LOONIE’ ROLLER COASTER RIDE!

    J.P.

    Reply
  • Keith, I am frustrated that I cannot locate an ETF/stock that emulates the price of natural gas.
    I am aware of both UNG and HUN, and have experienced their disconnected corelation to the NG index. I believe both invest in “futures” and UNG in the past has been affected by contagion and also a lack of futures correlation to the current price.
    Questions:
    1) Is there a true equity which correlates quite closely to the NG index, minus the MER?
    2) If not why not? Why is it always futures based?
    3) I recall you have invested in the NG game and wonder if you were going to go long today, what equity would you use?

    As Brooke is predicting the odds are favorable for NG to gain up until mid-April, I’d like to participate, as I too believe there is more opportunity for growth then there is risk for downside.

    Thanks

    Reply
    • You might want to look at a Nat gas producer or a company with a component of nat gas production. Google “natural gas stocks” to get the names, lots out there – I don’t have any specific recommendations – but I have actually played the Horizons ETF per your note. Yes, these are based on contracts, and thus have some contango (time and storage cost erosion) built into them which distorts their price vs. the underlying. Depends on how long you hold them. Shorter the better….

      Reply
  • I am bullish on oil over the next 2 months. However on Market call today they had Joseph Schacter on and he is predicting oil to drop below $50 by the end of the second quarter. Yesterday they had Eric Nuttall on and he is predicting oil to hit $70. Both guys have polar opposite views. It is very confusing for the average investor, I look at the charts and to me Eric seems to be winning the argument. Am I reading the charts right or am I missing something?

    Reply
    • Just look at the chart. Opinions are a dime a dozen. For now, the chart is constructive, albeit not outright wonderful. So, I am long oil with the seasonals as another factor in my trade. If the sector doesn’t move by May or so, I am out.

      Reply

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