By Michael O’Neill

Loonie Day is just around the corner and Canadians are ready to party hearty.  There will be plenty of beer, burgers and fireworks as friends and families gather to celebrate the coin’s 32^nd birthday on June 30.  Unfortunately, the Loonie bash is always eclipsed by Canada Day on July 1^st.

Canada was the original Brexit, except no one ever heard of the term, or the European Union, at the time.   The British North America Act of 1867 created the nation and the Canadian dollar a year later. 

The Dominion Notes Act of 1868 fixed the value of the Canadian dollar against the British Sovereign at $4.8666 and against the US $10 gold eagle at $10.00.  Things change.  Over the years, the value of the Canadian dollar shifted back and forth from, the gold standard, to fixed exchange rates to a floating rate.  (whereby market forces determine the currency’s value.)   It has been floating since 1970. 

The Loonie was born 119 years after the Dominion Notes Act.  It is a one-dollar coin that replaced the bank note of the same value.  It featured a Robert-Ralph Carmichael design of a Loon in the water, and instantly became the “Loonie”.  At the time, the Canadian dollar traded at 74.07 US cents for one Loonie.  Thirty-two years later, almost to the day, the Loonie trades at 76.10 cents to the US dollar.

This year, things are looking up for the currency and the country.

It starts with the economy.  The Bank of Canada’s baseline view is that the domestic economy will pick-up in the second half of 2019.  The BoC expects Q2 economic growth at 1.3% which compared to other forecasts may be a tad conservative.  Bank of Montreal economists forecast Q2 Real GDP at 2.5%, CIBC predicts Q2 at 2.6% and Scotiabank’s nowcast suggests 2.20%.

Recent economic data supports the Bank’s view.  Canadian inflation was better than expected.  The average of the BoC’s three preferred core inflation measures was 2.07%, which is above the BoC inflation target of 2.0%.  Retail Sales were not too shabby either.   The April gain was 0.1%, a tad worse than forecast but a great result considering the lousy weather during the month.  Canada’s unemployment rate of 5.4% is the lowest since data became available in 1976.

Source: RobertHalf.ca

The BoC notes that the robust employment picture improved consumer confidence, supported household spending, and underpinned Retail Sales.  Better than expected economic growth underpins the Canadian dollar.

The outlook for Canada’s oil patch has improved.  Last week, The Canadian government approved the Trans Mountain Pipeline Expansion, which was a “no-brainers since they own it.  (They bought it for $4.5 billion, from Kinder-Morgan May 29, 2018)  It is an excellent long term development for Alberta and could jump-start foreign investment.  Even better, crude oil prices have soared for the past two weeks.  West Texas Intermediate rocketed 18% since June 11, as US/Iran tensions escalated.  Traders fear a disruption of crude supply if Iran manages to close the Strait of Hormuz.  Prices were further underpinned by news that US crude inventories were shrinking and by expectations that Opec and Russia will extend crude production cuts until the end of the year.  The oil price rally exacerbated demand for the Loonie.

The American cancellation of tariffs imposed on Canadian steel and aluminum imports is another positive development, and it could be a harbinger of things to come.

The BoC was one of several central banks that said the escalation of the China/US trade conflict was a significant risk to their domestic growth outlooks.  There is hope for a resolution.  On June 25, US Treasury Secretary Steven Mnuchin that they were 90% of their way (to a deal) and he thought it could get finished.   President Trump meets with President Xi Jinping on June 30, and although he tweets “hot and cold” about the prospects for an agreement, a resumption of the trade discussions would improve the outlook for global growth and the Canadian dollar, by default.

The outperformance of the domestic economy compared to its G-10 peers also questions forecast suggesting the BoC will need to trim interest rates.   The market is pricing two rate cuts for the Fed and just one for the BoC.  A US/China trade deal may keep the BoC on the sidelines.

Canada’s improved economic performance, narrowing CAD/US interest rate spreads, improved global growth prospects and soaring oil prices have led to Canadian dollar demand   The USDCAD technicals support the view. The medium-term technicals flipped to bearish USDCAD (bullish Canadian dollars) when USDCAD dropped through support at 1.3350, (CAD 74.90 cents to $1.00 USD) opening the door to additional losses to 1.2930 (CAD 77.34 to $1.00 USD).  The monthly charts suggest that if 1.2930 (the uptrend line from 2012) breaks decisively, 1.2500 is in the cards.  (CAD 80.00 cents to $1.00 USD)

Bearish USDCAD analysts may be looking at the wrong end of the gift horse.  There is no shortage of event risk lurking in the weeds for the Loonie.  China may increase its trade sanctions and other pressures due to their displeasure at perceived Canada insults.  The China/US trade negotiations could fail miserably, or Trump could just change his mind even if there is an agreement.  He did it to Mexico after the USMCA was completed.  US/Iran tensions could escalate into an actual shooting war or the Brexit mess could devolve into utter chaos. 

Nevertheless, this weekend is a time to celebrate.  Happy Birthday Loonie and Canada.