I’ve been bearish on the Canadian dollar CADUSD-FX for a long time and this is one call that did prove to be spectacularly correct. Perhaps it is time for a rethink at current levels – at 69.3 cents U.S, it is the weakest it has been since March, 2020.
It seems obvious now that enough is being done to placate the Donald Trump team, so this 25 per cent tariff threat is dissipating. A less dovish Fed is already priced in and the Bank of Canada has switched its cadence to a go-slow approach to monetary easing. The incoming economic data for Canada have been soft but are beginning to show some stability – as in, no longer deteriorating.
The political turmoil in Ottawa is a current cloud, but anything that brings about a change in government to a more business and market-friendly landscape under the Conservatives should be construed as a longer-term positive for the beleaguered loonie.
Lastly, negative sentiment and positioning on the Canadian dollar have hit extreme levels — the net speculative short positions on the Chicago Mercantile Exchange have doubled these past two months to a near-record 180,749 net bearish bets (fifth most on record). Fodder for the contrarian crowd.
There is one bright light in Canada which is that the Bank of Canada’s rate cuts are starting to percolate through the one sector that is most interest/credit-sensitive: the housing market. This is by no means to suggest that the BoC is done, but it does mean that the Bank is not pushing on a string.
Residential real estate is stirring again. The volume of nationwide home sales swelled 2.8 per cent month over month in November to 44,590 units, marking the fourth increase in a row. While home prices are still down 1.1 per cent on a year over year basis (that, the central bank does not mind seeing), the sequential data point to some stability coming to the fore, with month-over-month price gains in November of 0.6 per cent the best tally since July.
More numbers like these will allow the BoC to do what it suggested at the recent meeting, which was to start going slower and less aggressive on the rate-cutting path. There’s another 100 basis points of monetary easing before the overnight rate reaches the low end of the 2.25 per cent to 3.25 per cent “neutral” range, and I’m expecting we’ll get there.
So why am I starting to lean against the view that Trump is actually going to be placing a 25 per cent tariff on Canada. For one, Ottawa is already allocating $1.3 billion toward tightening the border. Second, we have some of the Canadian premiers, notably Ontario’s Doug Ford, stating unequivocally that a trade war will be sparked, and it should not be underestimated how important that is to the U.S. economy – Canada may be small, but it is the leading source of imported electricity into the U.S. Not just electricity, but energy of all sorts – try over $120 billion annually of crude oil exports. And then we have critical minerals (60 per cent of all outbound shipments from Canada in this regard are sold into the United States) and natural gas (45 per cent of Canadian exports here go to the U.S. every year).
So, Trump would clearly have to be off his rocker to impose anything close to a 25 per cent tariff on Canada, and Justin Trudeau should have made that clear when he went groveling at Mar-a-Lago a few weeks ago. I’m beginning to think this issue resides somewhere between a sham and bluster.
As such, and especially with the odds that we could see a change in political leadership in Canada at any time, this leaves me far less bearish on the Canadian dollar than I had been over the course of the past several months.
David Rosenberg is founder of Rosenberg Research.
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