Okay, okay, so I said buy the Loonie in December. In my defense, I said it may be time to buy, but enough quibbling. Frankly, it has always bothered me that investors never want to buy things when they are on sale. And right now, the Loonie is on sale! The arguments I put forth a month ago still hold water today and now I’m banging the table…back the truck up!
We’ve had some further negative catalysts in recent weeks for the Canadian Dollar. The price for crude oil has continued to fall. I believe oil is overshooting at these levels although it could always fall further. However, we are much closer to the bottom than the top, that is for sure. What will cause oil to bottom and start to move higher? That is an enigma. We won’t know it until it happens, like when King Abdullah died in Saudi and crude spiked. Oil is just primed for some type of international event to kick us in the pants and say, oil is too low and should be priced higher! Think some type of geopolitical conflict in the Gulf or something like that – and there are plenty of those brewing at the moment. I think it’s only a matter of time.
The plunge in the price of crude has hit the Canadian economy; that is a fact. However, there is a lag factor to all of this. We are seeing inflation fall as the economy struggles to deal with the loss of economic activity in the energy sector. The Canadian Central Bank acted to counter this with a surprise move this week to cut short term rates. This caused the CAD/USD pair to spike ten cents. However, a lag works in both directions. When oil puts in a bottom and starts to possibly drift higher, there will be an upward push to the Canadian economy. We are also still waiting to see the improved economic activity south of the border spill north into Canada. There is no doubt America’s economy is on the upswing. All of this is positive for the Loonie.
One factor that has emerged dominant in the last few days is the strength of the quantitative easing program announced by the European Central Bank. Draghi announced a basically open-ended program of buying European sovereign debt for the foreseeable future to attempt to restart the moribund Eurozone. In fact, we are in the middle of a massive currency war breaking out globally. This situation may have as much to do with the Canadian Central Bank’s actions as their fears of inflation. They don’t want to be last in the global race to the bottom in interest rates.
The good news for Canada, that I alluded to in my post a month ago, is that sometime in 2015, the U.S. economy will start to accelerate in spite of the U.S. government’s attempts to regulate it to death. This acceleration will be felt in Canada also as Americans buy more Canadian products. The Keystone Pipeline will most likely be approved in the next two years. This will be a symbolic, as well as numerical boost to Canada’s exports. I believe when the central bank sees this activity kick in, they will put back the twenty-five basis points they took out this week.
The USD is enjoying high times at the moment because it is the cleanest shirt in the dirty pile. However, as China rises and the EU benefits from free money, perhaps some of the flight to quality demand the dollar is experiencing will wain.
All of these reasons support my argument that this is a historic buying opportunity for the Loonie. It is the perfect negative storm that will not last. If you are looking for an inexpensive store of value to park your wealth, the Loonie is it at the moment.
L Todd Wood