The epic meltdown in Canadian dollar
Trotsky once said that revolution is impossible until it becomes unthinkable. I feel the same way about currency devaluations. That is why I went bearish on the Japanese yen in late 2012 at 85 when Shinzo Abe entered the world stage bearish the Indian rupee at 45 in 2011 when Subbaro bowed to Sirji Chidambaram and reflated M2 by a shocking 20 per cent short euro at 1.36 when the Bundesbank panicked and grudgingly allowed Dottore Draghi to deflate the euro (lira?) with money printing and short the Canadian dollar at 1.06 as oil crumbled along with Uncle Sam - Ottawa yield spreads. Canada has plunged to 1.42. Now what? The easy money on the King Dollar trade has been made but the greenback supercycle trend is only in its fourth year. Awful global growth strong US job/housing markets China risk plunge in crude/copper stress in Wall Street high yield debt market US industrial recession a plunge in world trade all tell me this is no time to abandon the King Dollar macro idea so wildly profitable since mid 2013. As long as central bank divergence in Washington Tokyo and Frankfurt continues the US dollar remains "buy on dip" as it was against the euro at 1.12 in December. My most successful strategy trade in 2015 was of course the short against the Canadian dollar thanks to my need to constantly hedge loonie assets and remit funds to the Dauphin in Montreal. The Canadian dollar depreciated 17 per cent against the US dollar in 2015. I begged my friends colleagues and relatives who own homes in Toronto Montreal and even Vancouver to hedge loonie risk since late spring 2014. The Canadian dollar has fallen 30 per cent since I began writing my anti-loonie warnings in this column. Time heals all wounds true - but never ever in the world currency market. "When in trouble double" is insane and hope is not a strategy as so many Gulf investors who rashly invested currency in unhedged Canadian homes (the petrodollar snowbirds!) have learnt to their bitter cost. Since I believe we are in a period of protracted low oil prices I doubt if the Canadian dollar can even rise to 1.30 in 2016 though at 1.46 the "value investor" DNA in me will begin to nibble on the long side on the loonie probably by borrowing in yen or Swissies. The Fed and the Bank of Canada are on divergent policy paths and Uncle Sam - Canuck bond spreads are the widest since 2007. January is usually the best month of the year to be short loonie. However the epic 32 per cent fall in the Canadian dollar has made it hugely attractive against other commodity currencies in the world directly exposed to China risk such as the Australian dollar or Brazilian Real. The Swiss franc is the most overvalued G-10 currency in the world so a long loonie funded by a Helvetica bank overdraft makes strategic sense to me. The Canadian economy has not revived convincingly due to the drag from mining/oil and gas even though the cheap loonie will revive exports to a growing US economy. Capex is mediocre but there is momentum in business services and even construction. Canada faces high consumer debt weak wage growth and potential credit downgrades in Ontario and Quebec. My fear is that the collapse of the loonie will pass through to inflation which could be the highest among the Western economies in 2016. This could provoke a Bank of Canada rate hike in summer 2016 especially if the Fed Funds rate rises 100 basis points. As long as the Canadian overnight base rate remains 0.5 per cent and economic data points remain anemic Governor Poloz at the Bank of Canada will not shadow the monetary normalisation at the Federal Reserve. This means the Canadian dollar's path of least resistance is down to 1.46-1.48. The Liberal government of Justin Trudeau will avoid a financial squeeze on the economy at all cost even if core inflation rises above two per cent. A Bank of Canada rate cut is unlikely. The easy money on the short Canadian dollar has been made. It now time to nibble loonie longs against the yen Swissie and Aussie. Another funding currency for a Canada long? The Singapore dollar as the trade property and credit time bomb in Southeast Asia explodes with a vengeance in 2016.
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