The Canadian dollar continues to tank
Canada was a victim of King Dollar and a host of other events.
Unlike the US, Canadian consumer spending, capex and business confidence is muted while the oil shock offsets export acceleration.
The collapse of the Canadian dollar from 1.06 to 1.27 in the past year was one of the most spectacular money-making opportunities in the foreign exchange market. Canada was a victim of King Dollar, the crash in crude oil/gold/base metals, anaemic economic growth relative to the US and the shock Bank of Canada interest rate cut last January. As the Yellen Fed tightens US monetary policy this autumn, US/Canada interest rate spreads will only rise. While the 20 per cent depreciation of the loonie since summer 2014 will boost Canadian exports to the US (particularly timber and auto parts), the financial distress in Alberta oilfields and Western mining states will keep the Ottawa central bank reluctant to tighten monetary policy, since Governor Poloz is also worried about speculative bubbles in the Toronto/Montreal condo and Vancouver housing markets.
Unlike the US, Canadian consumer spending, capex and business confidence is muted while the oil shock offsets export acceleration. In any case, the US economy has long recovered from its first quarter economic slump due to the Arctic weather, the California port strikes and the Texas shale drilling layoffs. US housing starts are 1.1 million. Auto sales are 17 million units after seasonal adjustments, a post-crisis peak. Greece's IMF default, capital controls, banking crisis and "OXI" (no) vote in Syriza's referendum to the Troika's austerity diktat are all a sword of Damocles on the euro. It is no coincidence that oil prices plummeted 15 per cent after the Greek crisis and the Shanghai/Shenzhen stock market collapse. The world's positioning, sentiment, asset allocation and capital flows all suggest the King Dollar trade is not over. This means the Canadian dollar can well depreciate to 1.32 by Christmas. Like other global petrocurrencies (Russian rouble, Norwegian kroner, Malaysian ringgit, Mexican peso), the Canadian dollar is vulnerable to a fall in Brent crude to $40 this autumn.
Canada's economic growth rate in the first quarter of 2015 was 0.6 per cent, the first six-month contraction since 2011, a testament to the Dominion's commodity-price vulnerability. Canada will struggle to deliver two per cent GDP growth in 2015, lagging the US by a full percentage point. While Ontario and Quebec's factories and services businesses add 10,000-12,000 new jobs a month, layoffs in Alberta, Manitoba, Saskatchewan and British Colmbia oil/mining sectors will continue. Sluggish wage growth will also hit consumer spending and an overvalued housing market at high ownership levels is yet another risk. Corporate capex will not provide economic ballast, as oil/mining woes deepen.
At 1.04 against the euro, the Swiss franc is the world's true safe-haven currency, up 15 per cent since the Swiss National Bank under Dr Thomas Jordan abandoned its failed 1.20 ceiling peg against the euro. The Swiss franc has risen six per cent against the dollar and is epically, even comically, overvalued at its current rate of 0.9380 against the dollar. The Swiss franc (with its negative interest rates) has devastated Switzerland's export industries, from watchmakers in the Jura to the private banks of the Bahnhofstrasse and the ski resorts of Verbier, Montana, Courchavelsky and Gstaad! Its narrow range against the US dollar and the euro despite the Greek debacle suggests SNB intervention in money markets. Chicago futures data indicates the Swiss franc is the only major currency in the world where speculators are long against the US dollar, albeit the net long Swissie IMM position is only $0.8 billion, chump change in the $5 trillion global currency souk. I believe the safe haven bid in the Swiss franc has peaked as the Helvetica slips into recession. The Swiss franc is the world's most overvalued currency.
Geneva is shockingly expensive and my friends who live there tell me about weekend shopping trips to France, maids demanding $3,000-a-month salaries, corporate profits fall and layoffs. The minus-0.75 per cent SNB policy rate hits offshore hot money since the ECB began its QE programme. A high-carry cross-trade that benefits from Swiss deflation and the oil price crash is long Indian rupee/short Swiss franc. The macro stars are aligned, dear Brutus.