Why the Canadian dollar can still fall to 1.42

Dubai - Forex market sceptical about Opec pact, intrinsic fundamentals of loonie

The canadian dollar's rise after the Opec output cut in Vienna was modest relative to the $10 surge in Brent crude oil. Obviously, the foreign exchange market is sceptical about both the Opec pact and the intrinsic fundamentals of the Canadian dollar. US economic growth could accelerate above three per cent in 2017 while Canada will be lucky to manage one per cent growth. The Federal Reserve could well engineer three or even four rate hikes in 2017. This will simply not be the case for the Bank of Canada, which faces an economy mired with weak growth, a housing bubble in Vancouver and Toronto and a rise in job losses. If Trump accelerates infrastructure spending and deficit linked US Treasury bond issuance, the world financial markets will scramble to embrace the US dollar and sell the loonie as US-Canada interest rate spreads widen. A Republican President (and Congress) in Washington also contrasts with a liberal Prime Minister in Ottawa.
In any case, Bank of Canada governor Stephen Poloz wants a soft loonie to boost Canadian non-energy exports, the reason he shifted to a dovish monetary bias in October 2016. Trump's corporate tax repatriation plan ($2.5 trillion US offshore assets) and protectionist moves against NAFTA and Canadian lumber/auto part exports to the US could lead to a loss of confidence in the loonie in Planet Forex, as would any bearish data points in the global oil market (eg US inventories, surge in the land rig count, Permian Basin/Bakken shale output, Iraqi quota cheating, Libyan and Nigerian exports etc). Net net, balance of risk is skewed entirely against the Canadian dollar in 2017 despite the mild euphoria of an OPEC pact. That means the loonie can well depreciate to 1.42 by next spring. I would short the loonie on any uptick and short the loonie with impunity (no tight stops).
The bloodbath in the US and global bond markets began even before the shock win of Donald Trump on Election Day. Global bonds have lost $1.8 trillion as the yield on the 10-year US Treasury note surged from 1.75 to 2.45 in only six weeks. This has led to epic inflows in the US dollar, falls in the price of gold and a stunning (but entirely predictable) rally in bank shares. The inflation linked bond markets prices a two per cent CPI for 10 years, its highest race in two years. The rise in Brent crude to $54 after Vienna has only helped to accelerate the surge in US Treasury bond yields and even the November 0.1 per cent average hourly earnings did little to dampen angst about wage inflation risk when the US labour market is white hot, with a 4.6 per cent unemployment rate.
The era of easy money and a ultra-dovish Yellen Fed is over. Donald Trump's fiscal stimulus means a 1.50 per cent Fed Funds policy rate and a three per cent 10-year US Treasury note yield by end 2017. The world's cost of risk free capital has risen alarmingly and the 32-year bond bull market is as dead as Nineveh and Thebes, even as the baby boomers retire and the population of the West ages. Private Bankerji's leveraged bond and structured products trade ideas are financial neutron bombs designed to fleece gullible UAE investors with exploitative hidden fees. It makes no sense to pay five per cent in hidden fees for toxic leveraged products that can and will wipe out investors in 2017.
In June 2016, I wrote successive columns warning investors to guard against the rise of King Dollar. By early December 2016, the US Dollar Index has risen to almost 102 before profit taking set in. Yet the macro path for Japan, China, Britain and the EU is replete with fiscal, monetary and political minefields. The ECB, the Bank of Japan and the People's Bank of china all have no choice but to continue their monetary largesse.
With no collapse in UK growth, deep fear about European populism and the most extreme short cable positioning since the collapse of RBS in October 2008, it did not surprise me that sterling traded above 1.27 against the US dollar as I write. The Tory Brexit Minister David Davies has also softened his tone on EU single market access. Westminster, Brussels, Berlin, Rome, Paris, Frankfurt and Washington politics will decide if sterling moves above 1.30. Impossible to predict but the balance of risks screams Short the Quid, Mate!
The writer is a global equities strategist and fund manager.
 

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