Don’t Look Now

A very happy Gobble Gobble day to everyone in Canada. I can smell the turkey from all the way down here. I hope everyone is well rested after the long weekend and ready for another week of mortgage wars.

One thing about me is that when I am wrong – I admit it. We all get it wrong. But, the flip side of that is that when I am right – you are going to hear about it. For the better part of 2024 my main concern with the BOC and the easing cycle of interest rates has been the devaluation of the Canadian dollar. I have been pretty steadfast that Canada will cut and cut, and that will weaken the CAD against a lot of currencies, but specifically the US dollar. Now, for this viewpoint, I have been in the minority, and have had to read a lot of commentary about how I was wrong, it won’t matter, and on and on and on. A lot of very well respected mortgage business people have taken the other side of the trade – at least publicly, and have made a lot of comments that it won’t be that big of a deal. I warned a lot of them when they were publishing their content, social media posts, newsletters etc. to not jump the gun, and a few weeks does not make a market, but they went out and posted anyways.

As most of us probably know, if the CAD drops too much relative to the USD then it makes things Canada imports more expensive, and can drive inflation back up. For those of you who are new, the thesis was that, Yes, Canada would cut rates, but once the US Fed started cutting rates then the currency would come back in line. All summer we saw the CAD gain a little strength against the USD, and all the commentary started coming out how the fact the BOC was cutting was having no effect on the CAD, etc. etc. I warned all of these people that the move was short lived, and here we are. Let’s explore:

When I talk about the dollars, I always compare the USD to the CAD, not the other way around. In Canada, you are probably accustomed to seeing the exchange rate posted as $.72. This simply means a Canadian dollar ( can we call them Chuck Bucks now ) would get you 72 cents USD. However, when I speak, I always show what a US Dollar would get me in Canadian. I do this for ease, as I always compare other currencies, and starting with a baseline of USD is just easier. Back on Jan 1, 2024, a USD would have bought me about $1.32 CDN. Today, my same USD buys me about $1.38 CDN. That is a hell of a lot of depreciation in the CAD in 9 months. That means the Canadian dollar has depreciated by approx. 4.6% in 9 months. So while everyone was posting shit about inflation going down, the value of the dollar was going down just as quick – if not quicker. Anyone who wants to travel to the US, or import products now has to pay more. That is very inflationary.

The very odd thing that makes me smile from ear to ear, is that a lot of the gain in the USD has been AFTER the Federal Reserve announced their emergency 50 bps cut to the overnight rate. So even after the US started cutting rates, the Canadian dollar still lost ground. I told everyone that 3 weeks in July didn’t make a trend, but they got cocky and posted it anyways. So, why does a mortgage broker give a shit?

Well, in order for you to care, you need to understand currency. Currency markets are the deepest, most liquid trading markets in the world. There is more money traded in currencies in a day than other assets will trade in a week, a month or a year. Currencies are traded 24 hours a day 7 days a week. With the market being so robust, so deep, and so liquid, what happens in these markets is a very good indication of a true market.

Currency markets are also the early bird. They are the asset class that shows up to the party early. Currency markets start to price in moves 12 to 18 months in advance of an actual event. A great example is all the way back in the mid 2000’s. As the US building boom was underway, currency markets started to price in the beating of the USD. In late 2004 a USD bought you about $1.38 CAD. By early 2007, the same USD bought you $1.15, and by the middle of 2007 when the credit crisis was starting to show its ugly little head, the USD only bought you $1.00 CAD. Of course we had to wait until sept 15 2008 to get the real crisis, but currency markets were pricing in the fall of the US financial system long before the actual event. So, if currency markets are starting to depreciate the CAD now, what does that say about the Canadian economy in the next 18 to 24 months? Probably nothing positive. Housing generally tends to do poorly when the economy does poorly.

The other issue I am seeing is that we are seeing CAD depreciate even though bond yields are going up. Generally as yields go up it attracts buyers of the bonds, and therefore the currency, but it is not having that affect this time. It has me a tad bit North of worried that even rising yields cannot light a fire under the currency. Keep in mind that most of the bond purchases are bought with foreign dollars. Why do foreigners not want higher yielding Canadian debt?

And just to add insult to injury, oil has shot up by around 20% at the same time the Canadian dollar is in free fall. Normally, Canada being what is referred to as a petrodollar, we see the CAD pick up some strength with higher oil prices. Imagine how bad the CAD would look if oil had not gone up? Maybe we should be thankful for the Canadian oil sands? I cannot ever remember seeing a time where oil was going up double digits and the CAD was falling at the same time.

There are several reasons we could be seeing a weaker CAD. Perhaps the USD is stronger than anticipated? Perhaps the Canadian economy is underperforming? Perhaps it is a combo of both happening. But, each of these have very real consequences. If the US Economy is anticipated by currency markets to be very strong, this is going to lead to surprise reports on the US front. We all know what happens when we get a blowout jobs number in the US, right? Yields go up. Since 85% of Canada’s yields are driven by US events, it drives home a real possibility that Canada could see yields go up even if the economy is not strong. According to the dancing realtors of Tik Tok, weak economic numbers mean lower rates. Lower rates mean house prices go to the moon ( insert rocket ship emoji here ). But what if we have a shit economy, AND interest rates go up? It is gonna be 3 shades of hard to sell a McMansion in Brampton for 1.6 Mil with an economy shitting the bed, higher interest rates, and higher inflation due to a depreciating Canadian dollar.

Now, please understand, this won’t happen tomorrow, or even next week. There will be hills and valleys, but the trend is starting to get concerning. The USD/CAD currency is sitting right at the top end of the range of a triple top. 3 times this year we have seen the USD approach and hit the $1.38 CAD point. It has never held, and has gone down afterwards, but it was all based on the US economy weakening. That doesn’t appear to be happening right now, so if, and it is still a big if, but if we blow through the $1.38 mark, that sets the currency up for a fresh rally. We could see the USD go to $1.42 CAD without a lot of resistance. That would put the currency in your version right around .682. That mark is sort of the next line of floor / ceiling support on the charts. If that happens, get ready to pay a shit load more for anything that gets imported. This next round of currency devaluation will also add a little fuel to the inflation reading.

Of course, all the people who were out proud as a peacock only a few months ago are now not interested in reporting on the currency. They have moved on to bashing US job revisions, and looking for the next BOC rate cut. Funny how being wrong has a way of changing the topic. Currencies will matter going forward and will be a very early indicator if things to come.

All I know is that if the current trend continues in the USD / CAD, there won’t be a lot of people crossing the border on my Thanksgiving to take advantage of the Black Friday deals.