By Michael O’Neill

Jim Croce fans and investors know that there are some rules you just don’t break. “You don’t tug on Superman’s cape, you don’t spit into the wind, you don’t pull the mask off that old Lone Ranger,” and right now, you don’t mess around buying the Canadian dollar.

Heresy? Canada’s Oil Conundrum

Canada has oil, lots and lots of oil. That’s true, and with WTI at $79.00/barrel, it is 75% higher than its 1983-2023 average price of $45.63 and 18% higher than its average price between 2013 and 2023. Meanwhile, USDCAD has rallied from 0.9935 in January 2013 to 1.3750 on May 8, 2024. The Canadian dollar is not living up to its “petro-currency” reputation. FX traders don’t see oil as an asset for the Canadian dollar, and neither does the Federal government.

Euro Snobs vs. Canadian Oil Sands

The European elite from countries without proven oil reserves (Germany, France, Italy, Belgium, Sweden, Spain, Portugal, etc.) have decided that Canada’s oil sands are causing far more CO2 emissions than all the thousands of coal mines in the US, China, India, and Indonesia. They have convinced Canadian politicians to leave around $14.0 trillion of wealth buried in the ground while encouraging them to borrow vast sums of money to invest in alternative energy. It’s no surprise that close to $50 billion of taxpayer funds went to European and Japanese-based auto manufacturers in the form of grants and guarantees. P.T. Barnum reportedly said that “there’s a sucker born every minute”; the Canadian government is proving his point.

The Rate Race: Loonie vs. Greenback

Oil aside, the biggest factor influencing the Canadian dollar is monetary policy divergence between the Bank of Canada and the Federal Reserve.

Fed Chair Jerome Powell and most of his colleagues have stressed that the last spate of economic data has not given them the “greater confidence” that inflation will achieve its target, which is the prerequisite for a rate cut. Meanwhile, Bank of Canada Governor Tiff Macklem says that he sees downward momentum in inflation and that “the message to Canadians is that we are getting closer.” He is, of course, referring to cutting rates.

On May 7, Minneapolis Fed President Neel Kashkari published his interest rate outlook, and for those expecting rate cuts, it was not good news. Kashkari argues that the FOMC has tightened monetary policy more aggressively compared to previous cycles and beyond the market’s general perception of what is considered a neutral policy stance. He points out that despite this significant tightening, the housing market has exhibited unusual resilience. This unexpected strength suggests that the market may be underestimating the current neutral interest rate. That means that if the true neutral rate is higher than previously thought, interest rates are probably not as restrictive as they appear either.

Boston Fed President Susan Collins appears to agree with Mr. Powell and Mr. Kashkari. On May 8, she said the recent upward surprises to inflation mean it will take more time to achieve inflation targets.

The CME FedWatch tool shows traders betting on a Fed rate cut in September and again in December. The TMX Montreal Exchange Canadian Futures suggest the odds for a Bank of Canada rate cut in June are 70%. The widening CADUS 10-year interest rate spread is weighing on the Canadian dollar.


Canada’s Dollar Blues: Immigration, Affordability, and… Unions?

The Canadian dollar has other issues. The government’s open-door immigration policy has created additional stress on the housing market. Prices for rental properties have soared in recent years. The average price for a one-bedroom unfurnished unit in Vancouver was $2,633 in April 2024. A similar unit in the Greater Toronto Area is $2,283. That’s expensive when you consider Statistics Canada’s median income for 25-34-year-olds in Toronto (as of 2022) is $46,500 and in BC is $49,400. After taxes, a renter in Toronto is left with a mere $573.75 to cover life. It’s worse in BC, where a person is left with a meager $410.00. If no one has money to spend, everyone loses, and the economy will tank.

USDCAD: Technically Bullish, Fundamentally Shaky

The USDCAD technicals are bullish and arguably mean USDCAD is likely to see 1.4000 before seeing 1.3500. The weekly MACD and RSI momentum indicators are also pointing higher. With a sluggish economy, a stressed housing market, and potential for government worker strikes, the Canadian dollar is heading down hill. Like Jim Croce sang- “You don’t mess around with Jim”-or go long Canadian dollars.