Our neighbors to the north have had a rough time of it lately.Only recently, the government announced the Canadian economy shrank 0.1% in the January of this year.The reason for this slowdown is obvious; it’s the crash in the price of crude oil which has severely hurt economic activity.Pundits and professors are coming out of the woodwork as we speak, crowing that the Canada is doomed—dogs and cats living together, fire and brimstone, end of the earth kind of stuff.
I’d like to take a contrarian view.
Yes, there is a current divergence in interest rates between the two currencies. The Fed is most likely to raise at some point this year while many analysts say the Canadian central bank could cut another 25 basis points in light of the recent, dismal economic performance. However, this view ignores a growing imbalance in Canada—rising levels of consumer debt. This problem was enhanced by the surprise rate cut in January, a cut meant to cushion the economy from the consequences of the falling price of oil, a major Canadian economic sector. I don’t think the central bank will want to exacerbate the credit bubble any further in Canada so I don’t think they will cut barring a major economic downside shock.
Canada is currently absorbing the loss of economic activity in the western part of the country that is tied to energy. Obviously, the slowdown in the energy sector has had a seriously negative impact on overall growth. The night is always darkest before the dawn and here’s why. Energy has driven Canadian economic growth for a decade. I don’t think the price of oil is going to rebound anytime soon; however, I don’t think it is going to fall significantly further as many expect. There is too much geopolitical turmoil in the Middle East for that to happen and I don’t see this risk premium being taken out of the price of oil anytime soon. I think the price of crude will trade in a range around the $50 area for the foreseeable future. So I don’t see the gloom and doom that many are forecasting for Canada.
The flip side is that we are yet to see the economic benefits of the lower price of oil in the American economy, which is the historical driver for Canadian economic growth.The United States has been disappointed over and over again with the stop and start recovery. The policies of the Obama administration have acted like a wet blanket over the entire US economy. Obama takes credit for whatever recovery America has felt but any intelligent person can see that it was the shale boom that fueled the last couple years of growth to the upside. This surge is likely over.
But there will soon be another driver of investment and economic growth in the United States. Call it a political dividend. President Obama will soon be out of office. I believe the country is hungry for a conservative leader who will undo much of the damage the Obama administration has inflicted on the country and the economy. This means pro-growth policies and strong economic and global leadership. As we get closer and closer to the election in 2016, this dividend will grow. Companies will start higher and investing in future economic opportunities as they will start to believe in real change that they can believe in is just around the corner. The economy is a leading indicator.
A resurging America is what Canada needs to ramp up its manufacturing and raw materials economic engines. Growth will move from the west to the east and into the manufacturing and services sectors.
My point is now is the time to sell U.S. dollars and buy the Canadian dollar. Don’t wait for these trends to be baked into the price. Make the trade now while there is still blood in the water. This may not be the absolute bottom for CAD but we are much closer to the bottom than the top. A year from now I think you will be very happy.
L.Todd Wood is a former emerging market debt trader with 18 years of Wall Street and international experience. He is also an author of historical fiction thriller novels. His first of several books, Currency, deals with the consequences of overwhelming sovereign debt. He is a contributor to Fox Business, Newsmax TV, and others. LToddWood.com