(MENAFN- Khaleej Times) Irecommended buying the Canadian dollar at 1.46 since the loonie was grossly undervalued after eighteen months of consistent selling in the global currency markets. In fact this column had recommended buying the US dollar against Canada way back in spring 2014 at 1.06 on the eve of the oil crash. I now believe the Canadian dollar is overvalued relative to West Texas crude at 1.29. Why?
One the speculative short position as the loonie bottomed in late January at 1.46 is now virtually wiped out. This is the reason the Canadian dollar surged do dramatically in the past eight weeks though the 40 per cent rally in West Texas crude and positioning for Justin Trudeau's pro-growth Ottawa budget provided ample fundamental ballast to the rally. However at 1.29 the Canadian dollar has "overshot" its fundamentals now that its entire losses since October 2014/January 2015 have been recovered. Two the Canadian dollar's correlations to West Texas crude have only risen since the 2014 oil crash began a testament to its role as Planet Forex's most liquid G-10 petrocurrency. However Saudi Arabia linked any output cuts to Iran which refuses to even negotiate an output freeze now that US sanctions are lifted. This limits the upside in West Texas crude - and the loonie. Three Ottawa's fiscally expansionary Federal budget (deficit spending is not a dirty word for the Liberals and M Trudeau) and an uptick in domestic growth data relative to consensus justified the epic move in the Canadian dollar. Yet these macro factors are fully priced in the Canadian dollar at 1.29-1.30. The Bank of Canada now fears loonie appreciation from current levels as it will hit manufactured exports. In any case the Bank of Canada has warned that the condo building binge in Vancouver and Toronto is a speculative bubble that Canadian housing is overvalued by 30 per cent and consumer debt a time bomb. The Canadian government estimates Trudeau's rise in Federal spending will boost growth 0.5 per cent in fiscal 2017 and fiscal 2018. Yet wage growth is still mediocre and the economic malaise in Alberta Manitoba Saskatchewan and the mining enclaves of British Colombia has now begun. The fall in the Canadian dollar will give a boost to manufacturing as will US auto component/timber demand. Still epic household debt is a sword of Damocles on Canadian consumer confidence and spending. This means the Bank of Canada will fear additional loonie strength. Four Canada's core inflation rate is now two per cent thanks to the pass through impact of the free fall in the Canadian dollar since 2014. This will not lead to any central bank rate hike in 2016 as the Bank of Canada is far too worried about the contraction in Alberta/mining states. However as the Bank of Canada pauses while the FOMC raises interest rates this summer US/Canada interest rate spreads argue the loonie depreciates to 1.36. No free fall but no more rocket bull run either. Five despite Dr Yellen's dovish warnings February and March payrolls saw the creation of 457000 new American jobs a symbol of accelerating growth momentum in the US economy. The euro's current rally is unsustainable given dismal EU growth rates banking woes geopolitical risks (migrants Greece Ukraine terrorism) deflation and Brexit risk. While Mario Draghi ruled out more deposit rate cuts 80 billion euros in bond purchases and credit easing in the corporate bond markets is hardly a steroid shot for Euro bulls. Brexit could be a political and economic disaster for the EU and will trigger hot money outflows from the Old World this summer as will the grim reality of negative interest rates. I believe the euro is once again a short at 1.15. Hence my strategy call to take profits to my fellow loonie bulls. My strategy call to accumulate the Russian rouble at 78 was in retrospect a winner. At 67 the Russian rouble now trades at a four month high against the US dollar thanks to the oil price spike and King Dollar's pause once the Yellen Fed dissed its own phony dotplot! Yet I can see the rouble depreciate to 72 this summer if Saudi Arabia refuses to cut output at Doha on April 17 and global risk assets are spooked by either Brexit or the Republican convention circus.
Emerging markets were an entirely predictable horror story once again in 2015. The oil/mining bust currency meltdowns China's hard landing sovereign credit downgrades banking system crises corruption scandals and geopolitical crises from Ukraine to Syria the Black Sea to the South China Sea devastated investor wealth in emerging markets. India's Sensex and Nifty were down nine per cent while the rupee has depreciated to 66 against the US dollar. GCC equities indices and even Egypt in the epicentre of a $500 billion lost petrocurrency revenue deflation shock due to oil the crash lost 30-35 per cent for investors. Turkey and Brazil mired in political scandals inflation crises and banking time bombs lost 40-45 per cent for investors. As the Fed raises its overnight borrowing rate China devalues its yuan with its new foreign exchange regime the IMF slashes global growth forecasts to only three per cent South Korean Chinese and Taiwan exports sag as world trade shrinks it is impossible for me to be a cheerleader for emerging markets. However amid the carnage money-making opportunities exist from Shanghai to Dubai from Mumbai or Uruguay. My best macro call for 2016 is Argentina. President Mauricio Macri a pro-business reformer has ended 12 years of Peronist misrule. Macri has fired the central bank governor ended capital controls devalued the peso cut farm export taxes revamped the dodgy statistics agency (Chinese comrades could use help here!) and negotiated with sovereign debt restructuring holdouts that have prevented Argentina's return to the international capital markets. Banco Galicia and Banco Macro shares rose 50 per cent in November when Wall Street realised that Macri could move into the Casa Rosada. So don't cry for me Argentina. Evita is your tragic past but Macri and Alejandro Allende are your future. Your banking system is miniscule smaller than Panama. This will change and I must thank the lords of the pampas for the stellar sovereign spreads in Gauchito Bonds sometime this spring. I would still short currencies with high external deficits mediocre GDP growth lousy political governance high inflation and commodities exposure. This means the South African rand (though Pravin is back) Brazil real Turkish lira Indonesian rupiah and the Colombian peso. Corporate/banking debt crises will emerge in India and the GCC. African equities will also remain a nightmare and I remain bearish Southeast Asia notably Thailand and Malaysia. Millennia after the Greeks trapped Xerxes' fleet in the ancient world's most epic sea battle before Actium Greece has been relegated to the emerging markets. My only interest in my beloved Aegean is to take my teenage twins to Mykonos the scene of my happiest youthful summers. Emerging markets are 40 per cent of global growth and could well trigger history's first "Made in China" recession. Brazil's economy bigger than Canada is the largest in Latin America and the seventh-largest in the world. Now that Joaquim Levy has resigned another sovereign debt credit downgrade is inevitable. As a Carioca friend pointed out Dilma's approval rating is below Brazil's eight per cent inflation rate. Ain't no sunshine when she's gone on Ipanema Beach? Not so. Dilma has ruined Brazil's economy and could well resign the only reason I would buy the Bovespa down 43 per cent in 2015. Now that Russians cannot sunbathe in Bodrum Marmaris or Kusadasi the odds of the third Russian Revolution since October 1917 are rising though Alexei Navalny is thankfully no Lenin. No interest in Moscow equities or Russian Eurobonds for now though the rouble has value at 72. I expect inflation to surge across emerging markets as currencies plunge. The Azerbaijan manat plunged 30 per cent last week after the Baku central bank abandoned its dollar peg. Yet devalued currencies can also boost exports squeeze imports and compress external deficits. This could be a source of hope in Jakarta and even Istanbul in 2016. US economic data momentum is a big risk if it causes aggressive Federal Reserve tightening and a spike in the US Treasury note yield. China's hard landing is ugly but could well turn uglier as its trillion dollar shadow (Ponzi) banking system implodes. A consumer debt/mortgage bubble could well devastate Hong Kong Singapore Thailand and South Korea. A major sovereign debt default or banking failure could shock Wall Street given $3.8 trillion in unhedged EM corporate debt. Turkish Indian Indonesian Russian and Mexican corporates and their "kitty banks" are obvious black swans (a philosophical oxymoron?). I am no Cassandra but I babysit multi-generation family money and know exactly what I want. I want inflation linked dividends no phony accounting no political risk. I want megacap America and Europe.