Spare A Dollar?

As I give out the Halloween candy this evening, I can’t help that think that Halloween and the Canadian housing market have a lot in common. Giving away extended ams and insured refinances probably won’t get the kiddos too pumped, but the average homeowner loves it. Of course, we are giving away things that we know long term are not good for either group. I also can’t help but point out that the person in charge of spearheading these changes from the current government also likes costumes.

But, enough about that. I have been getting a lot of questions the past week or so about the good ol Canadian dollar. A lot of people seem to be very interested on where it is heading, and why it is taking the path it is. Perhaps it is the travelling season that has the interest piqued, or maybe it is because the dollar doesn’t seem to go as far as it used to, but lets see what we can come up with. For the record, I still think we should be calling them Chuck Bucks with the new King, but that is just a side note.

As of late the Canadian dollar has really taking a beating. The last few weeks there has been a very large decline in where the dollar stands. Now, when we talk about a decline in the dollar, I don’t mean that your dollar is worth less in Canada, it is only for comparative purposes against another currency – for example the Canadian dollar vs. the US dollar. The Canadian dollar will always be worth a dollar in Canada – it just might not buy you as much as it used to.

Whenever we look at movements in an item – whether it be a commodity, a bond, interest rates, stocks, etc. there are 2 things that matter. First is the direction it is going, but just as important is the velocity at which it is going. Speed is just as important as direction. Only 30 days ago the Canadian dollar stood at .74553 USD, meaning your Canadian dollar should get you about 74.5 cents USD. ( side note, you would never be able to get that rate, as the banks tack on their margins and commissions, but that is the market price ). Today the Canadian dollar would buy you just around 71.79 cents USD. Now, you may be thinking that a difference of 2.76 cents isn’t that big of a deal, but that represents a change of almost 4% in 30 days. A 4% change in an exchange rate of 2 countries in the developed world. That is a big change. But, it gets a little worse when you go back to mid 2021 when the Canadian dollar was trading at almost 83 cents. That means the Canadian dollar has lost almost 12 cents in 3.5 years against the US greenback. That is almost a 14% depreciation of the Canadian dollar against the US. The CDN has lost 14% of its purchasing power vs the US dollar in a little over 3 years!!! So, why is the CAD taking it on the chin especially as of late?

1. Oil. Yes, good old black gold. In case you haven’t noticed, gas prices are down. Gas prices are down because oil is down. Canada is still considered a petro dollar, so if the price of crude oil drops, theoretically so does the Canadian dollar. Since oil is priced in US Dollars ( as is every other world commodity ) a buyer of oil must convert their money into Canadian dollars in order to buy Canadian oil. The higher oil prices are, the more Canadian dollars they need to buy, and so demand for Canadian funds is more, so hence the dollar goes up. Pretty straight forward. There is also a little bit of logic to the higher oil pricing leading to higher oil company profits, which begets higher tax revenue to Ottawa, which reduces risk that the government would default on the bonds, so ergo the Canadian dollar is stronger. Generally when commodities go up, so does the CAD, and vice versa. Oil is down, so that is pushing the CAD down a bit.
2. Economics. It does not take a rocket scientist to figure out the Canadian economy is struggling. Almost every single piece of data that comes out shows a continually weakening Canadian economy. A weak economy is going to lead to more interest rate cuts from Uncle Tiff. As rates go down ( bond rates ) it pays less yield to investors if Canadian bonds. If an investor in China has 1 Billion dollars to invest in government bonds, a lower Canadian bond yield vs a higher US bond yield would entice the Chinese investor to buy the US bond. If you buy the US bond, then you buy US dollars, so the USD gets a little stronger. On the flip side, if Canadian yields suddenly shot up, then you would see the Chinese investor sell the USD bond, and convert their money to Canadian to buy a Canadian bond, thus driving up the Canadian dollar. As we continue to see weak economic reports from the Canadian economy it increases bets that Tiff and Co. will cut rates further, thereby creating a negative feedback loop whereby economic reports are bad, which leads to rumours of new rate cuts, which lowers the dollar, which hurts the economy, which leads to bad economic numbers, and round and round we go.
3. Mr. Market. I have said it a thousand times before, and I will continue to say it – The foreign exchange market is one of the smartest markets in the world. Smarter than stocks, smarter than bonds, and smarter than any other type of traded security. Forex markets price in future events better than any other market. Right now, Mr. Market is pricing in a couple of things I believe. Firstly, the foreign exchange market is telling us that the Canadian economy will underperform the US economy. Notice I didn’t say that the US economy would go gangbusters – it will simply perform better than the Canadian economy. It is the ” cleanest dirty shirt argument”. Secondly, the foreign exchange market is starting to price in politics. Most markets ( stocks, bonds, and currencies ) have started to price in a Donald Trump White House in the coming days. Markets are viewing this as good for stocks, and good for the USD, and markets are re pricing this. Now, before I get all the hate mail, I did not say it was a good thing, a bad thing, or anything – I simply said that markets are predicting it, and markets believe this will be good for USD. On top of this, markets are seeing the 3 ring circus that is currently Canadian politics, and starting to assign a bit of a risk premium to Canadian currency. So, Mr. Market thinks that the US dollar will do well, but it also thinks the Canadian dollar will do poorly. Add both of those together, and it helps propel a 4% loss of currency in less than 30 days.
4. Technicals. In any market there is a sect of people that are referred to as ‘ market technical traders’. They trade off of nothing other than the technical signals of a market. May be a stock, may be a bond, hell, it could be coffee futures, but they only trade on technicals. I am a bit of a technical trader myself. I see the ranges and the bands, and I watch very closely for signals of weakness and strength, and watch for floors and ceiling pricing, as well as trends, and ranges. For the last couple years the Canadian to US dollar has been range bound in a range of .76 to .72. It has floated between 76 cents and 72 cents. However, in the last couple of days it has broken below the floor of 72 cents. This means that 72 cents is now a ceiling, and the next floor of the range is around 68 cents. There is simply not a lot of resistance stopping the Canadian dollar from falling to 68 cents USD. I didn’t say it would, but it certainly looks like the path of least resistance at this point. If the Canadian dollar cannot get back over 72 cents in the next week or so, a lot of money will be bet on the Canadian dollar continuing to fall by technical / momentum traders, and that can help the Canadian dollar downfall become a self fulfilling prophecy. All it is going to take is for US inflation to go up a touch, Canadian data to disappoint more than expected, and we could quickly see the value of a Chuck Buck erode. Of course, if US inflation goes down ( thereby making US rate cuts look more possible ) or Canadian data picks up, the exact opposite could also happen.

Personally, I think that US data will continue to come out stronger than markets anticipate, and will take Fed rate cut expectations down a peg or two. Quite honestly, there was no reason for the 50 bp cut in late September, and all the data since has supported leaving rates alone. The longer the Fed holds off on rate cuts, while Uncle Tiff takes a battle axe to the Canadian overnight rate, the quicker the Canadian dollar will fall. A 68 cent Canadian dollar is not the end of the world, it has happened before and Canada survived. But, and there is always a but, it may feel a lot different this time around. The last time Canada had a 68 cent dollar it was an exporting powerhouse. A dropping currency is great for exporters, but Canada doesn’t manufacture much anymore. We decided to put all our chips on housing, and we did so at the expense of building a strong, thriving manufacturing base. Now that the housing market is kind of shitting the bed, it makes it tough to generate growth.

If you want to see the prospects of a country, simply look at the currency market. The current market is telling you that Canada will probably underperform many other developed markets for the next 5 to 10 years. I didn’t say it would be absolute crap, but it will underperform. And I know, I know, the IMF and World Bank and every sitting politician said differently, but I believe the currency market over anyone else. Currency markets don’t get it wrong, currency markets don’t have to win an election, currency markets don’t promise things they can’t deliver on. Currency markets have all available data that is what I call ” pure data “. Pure data is data that cannot be manipulated by a person, a party, or at will for gain. Pure data is an open market, free from political influence, whereby participants can lay down their bets with no undue influence. Pure data will always tell you what market participants all over the world think will happen.

Currency markets are telling us that stormy days lay ahead for the Canadian economy. Canadian currency and Canadian housing are both going to struggle in the coming days, weeks and months. Of course, better days will come, but until then, it could be a bit of a tough slog. Plan accordingly, weatherproof your business, and make a plan to work smarter and harder. Some of the best business in existence today were built out of the worst economic times the world had ever known. If you fail to plan, it may be you asking to borrow a dollar……