The loonie's wings got further clipped last week, descending to fresh 4 1/2-year lows below 89 cents as investors gravitated to the greenback on prospects of sooner-than-expected interest rate hikes by the Federal Reserve and more sluggish economic growth ahead in Canada.
Alongside a positive week overall for U.S. equities -- the S&P 500 hit a fresh record intraday high earlier today -- that's making the American stock market all the more profitable for Canadians already invested there.
The temptation now may be cash in some gains from U.S. stocks, thinking the Canadian dollar may be oversold and poised for an upturn.
David Rosenberg's latest advice on the Canadian dollar: don't count on a sustainable snapback. The charts are looking increasingly ugly and there's little on the short-term horizon that would suggest a quick change in global market sentiment for our suddenly struggling currency.
"The outlook for the Canadian dollar is looking more and more dicey," Mr. Rosenberg, the chief economist with Gluskin Sheff, said Friday in his daily Breakfast With Dave research note. "Even with a massive volume of speculative short positions on the loonie and the fact it appears so woefully oversold, it has still managed to break down further on a technical basis."
"The chart does not look very good, and it is hard to identify what could happen near-term to cause this Newtonian ball from changing its motion," he added.
The loonie's first big drop this week came courtesy of Bank of Canada Governor Stephen Poloz, who delivered a gloomy speech suggesting slow economic growth in Canada will be here for some time, a scenario that would mean a protracted period of low interest rates. That was then followed up by Janet Yellen's surprise, seemingly off-the-cuff, remark a day later that it could take six months for rate hikes to begin after the central bank ends its massive monthly bond-buying program. Yellen's comment to reporters saw capital flows shift immediately to the greenback.
"I found it interesting that in the same week that BOC Governor Poloz lamented about a lower trend growth rate in Canada and hence a lower equilibrium policy rate that the Fed lowered neither in its collective forecast on Wednesday. The risks now are that the BOC begins to raise rates months or even quarters after the Fed does around mid-2015. This will reinforce the net redemptions of money market paper and bonds with respect to foreign investor holdings, which we have already seen outweigh the impressive net non-resident purchases of Canadian equities," said Mr. Rosenberg.
There's more working against the loonie, too. Mr. Rosenberg points out that there is a sense that second-quarter U.S. economic activity is going to surprise to the upside, especially if the huge amount of money that businesses have raised of late in both the commercial and industrial loan and commercial paper markets are put to work in the real economy.
And the political landscape seems to be shifting in a way that only makes the Canadian dollar less attractive at global trading desks, which tends to favour right-wing governments. With President Barack Obama's approval rating down to 41 per cent, the Republicans stand a good chance of maintaining the House and taking the Senate in the mid-term elections in November. In Canada, the latest polling suggests the Liberals have the lead in popular support and building momentum ahead of the next federal election in October of 2015. And then there's the sudden reappearance of Quebec sovereignty risks in the run up to the April 7 provincial election
"So not only is there a risk of Canadian economic policy shifting to the left as the U.S. moves back to the right, but surely Prime Minister Harper realizes that the local economy needs a big boost," said Mr. Rosenberg.
That boost is unlikely to come in the form of lowering interest rates from microscopic levels, nor from fiscal stimulus: new Finance minister Joe Oliver has already suggested balancing the budget in the number one priority, not spending.
"This then leaves the exchange rate as the only game in town in terms of being used as a 'tool' to stimulate the economy."
Mr. Rosenberg summed it up this way: "The Canadian dollar is certainly due for an oversold bounce here, but I wouldn't bother chasing a near-term rally, until we receive some positive shock that reverses the downward momentum. Unlike prior episodes of such Canadian dollar weakness, this is not taking place in the backdrop of a global recession (2009), Asian meltdown (1998) or severe domestic recession (1992) and has actually been very orderly with no financial market dislocations - and more to the point, seems to be something that Ottawa actually desires ... which is a slow but sure depreciation to bolster the economy and in turn the electoral hopes for the government of the day."
Darcy Keith