From the ashes, blood, and broken glass…
The Canadian dollar may have just been resurrected, as a hat trick of favorable indicators emerged last week.
Higher oil prices, a hold on national interest rates, and better-than-expected inflation rallied the loonie — ending Friday with a weekly gain not seen since 2011.
But has the multi-year, record losing streak for the Canadian dollar finally snapped?
The Loonie Flies
The Canadian dollar gained nearly 3% against the dollar last week — its best weekly performance in over four years.
This morning, the Canadian dollar slightly gave back some of its run against the USD. At last look, CAD was $0.704 to one U.S. dollar. Gold priced in Canadian dollars was just over $1,570 an ounce.
The loonie also made significant gains against other world currencies last week. CAD gained nearly 4% against the euro, over 3.5% against the yuan, and over 4% against the Mexican peso.
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Last week’s rally has left many Canadians hopeful. The loonie has experienced its longest period of decline since the 1970s — sparking fears of a full-blown recession across the True North.
A near 13% jump in crude oil prices was one of the factors that helped contribute to last week’s boost in the Canadian dollar. Oil prices for immediate delivery gained almost 8% last week, ending over $32 per barrel.
Energy contributes to about 40% of Canada’s GDP. So a significant rebound in crude prices will continue to lift the loonie.
Source: Natural Resources Canada calculations, based on Statistics Canada data
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Inflation data (also out on Friday) showed better-than-expected figures. Canadian inflation rose slightly to 1.6% — below the 1.7% expectations. However, inflation in Canada has been on the rise since April 2015. And many expect it to continue rising.
The Bank of Canada says:
Inflation in Canada is evolving broadly as expected. Total CPI inflation remains near the bottom of the Bank’s target range as the disinflationary effects of economic slack and low consumer energy prices are only partially offset by the inflationary impact of the lower Canadian dollar on the prices of imported goods. As all of these factors dissipate, the Bank expects inflation will rise to about 2 per cent by early 2017.
The fundamental driver of last week’s rally, however, was the Canadian Central Bank’s decision to hold its key interest rate steady at 0.5%.
Headed into the decision, expectations were evenly split whether the bank would cut or hold its interest rate. The hold at 0.5% comes after the Bank of Canada cut interest rates twice in 2015.
The Bank of Canada concludes, “The Bank now expects the economy’s return to above-potential growth to be delayed until the second quarter of 2016… The Bank projects Canada’s economy will grow by about 1 1/2 per cent in 2016 and 2 1/2 per cent in 2017.”
It seems that inflation will remain a problem for the loonie in the near- to mid-term. And key interest rates are set for the next few months. So it appears that crude oil and energy will be the main drivers of the loonie in the near-term. Precious and base metal prices will also likely play key factors in the value of CAD in the near-term, accounting for over a quarter of GDP.
Bullish on oil or metals and want to go long the loonie?
The easiest and purest way to get exposure to the Canadian dollar, aside from directly owning the currency as cash, is probably the Guggenheim CurrencyShares Canadian ETF (NYSE: FXC), which is simply designed to track the price of the currency.
Good Investing,
Luke Burgess
Energy and Capital
