Loonie ideas a winner

In retrospect, my strategy idea last week to buy the Canadian dollar at 1.45 for a 1.38 target proved highly profitable. Janet Yellen's dovish FOMC statement spooked Wall Street as it did not rule out a March rate hike but it also sapped the US dollar uptrend. The mere hint of a Russian-Saudi output deal led to the mother of all short covering rallies into Brent, up almost 20 per cent from its January lows to $36 a barrel. Canada, as a classic petrocurrency, (oil and gas is 25 per cent of exports) naturally benefited from spikes in Brent. The fall in the Chicago Volatility Index, a global bid in risk assets and a shock Bank of Japan rate cut helped the Canadian dollar soar from 1.45 to 1.3950 last week.
Financial distress in Alberta and Prairie home prices (Regina, Calgary, Saskatoon) do not allow me to be secular bullish on the loonie, as I doubt if Canada GDP growth in 2016 will top 1.2 per cent. The Fed funds/Eurodollar futures markets on the Chicago Merc now price one rate hike in 2016, not the four implied by the FOMC dot plot. There is a $4.6 billion net short Canadian position in the Chicago futures markets that must be squared as the foreign exchange market dials back its prospects of US monetary tightening. Yet the grim realities of the oil glut, Texan shale technologies, post-sanctions Iran, Saudi Arabia's unwillingness to be the Opec's "swing producer" and limit up storage capacity mean the secular bearish trend in oil and the Canadian dollar will resume. Take profits on the long Canada trade at 1.39 with a stellar six figure profit since the 1.45 trade entry level.
The Russian rouble's epic collapse to 81 provided an opportunity to finally buy the worst-performing major currency in emerging markets. I can envisage the buy/sell range on the Russian rouble at 81 to 72. Russia is in recession, with a four per cent GDP decline.
The 60 per cent fall in the rouble after Putin's Crimean Anschluss was the trade of the century (though I concede this is only 2016 and there are 84 long years to go in this century!). Sadly, family office investors in the Gulf were devastated by unhedged positions in Russian rouble denominated debt, notably in the notoriously volatile OFZ and rouble Eurobond markets. The long-term economic prospects of Russian are awful as the oil/metals bear market takes its toll and capital flight rise to its highest level since the fall of the Soviet Union. I expect the Russian public, with bitter memories of the rouble free fall and banking dominoes in August 1998 and August 2008, will do the rational thing and switch out of rouble deposits into US dollars. This could force Russia to impose capital controls. Expect billions of Russky dollars to suntan in Panama, Cyprus and the lakeside money souks of the Swiss Alps.
The collapse in the Russian rouble will unhinge inflation expectations (CPI is now 12 per cent) and threaten Putin's pensioner/fixed income constituency that lives outside Moscow and St Petersburg. This could have a geopolitical impact if the Kremlin agrees to a negotiated end to the Syrian civil war in Vienna. This could, in turn, set the stage for a Russian-Saudi Arabian diplomatic rapprochement and oil output deal. This would ignite a bull market in Russian OFZ bonds as the central bank in Moscow cuts its 11 per cent money market rate.
Sterling was last a petrocurrency during the North Sea oil bonanza of the early 1980s. Yet I am shocked to see sterling plummet from 1.70 two years ago to below 1.42 on cable now. Planet Forex has concluded that the sceptered isle will leave the European Union (the Brexit scenario). Sterling's seven per cent fall in the past three months is hugely correlated to the collapse in money centre banking shares, thanks to the City of London's role as a global finance hub. UK credit default swaps have also risen in 2016. I remember cable trading at 1.58 only last year and the gnomes of Bishopsgate brace for an Old Lady base rate hike. Mark Carney has done nothing to boost the sterling and the UK current account deficit is its Achilles heel at 4.5 per cent. I remember cable was a buy on the eve of the Scottish referendum and the general election. Is June Cameron's D-Day on the EU? Will wage inflation finally force Carney to act? Is 1.40 cable a historic level to, as in 2009, buy sterling? Finally buy sterling?
Researched and compiled by Matein Khalid. Mr Khalid is a global equities strategist and fund manager. He can be contacted at: matein@emirates.net.ae