If traders were to take clues from fundamental reports released this week, it would be easy to take a negative position on the loonie. The Canadian Trade Balance was a positive 80M (C$) but far less than the expected 300M and last months 850M. This report was followed by the IVY PMI survey, which again fell short of expectations, 54.1 versus 54.5 and 55.5 expected and last month's number.
Today the M/M Building Permits fell short of the guesses, down 3%, expected +4%, but well above last month's negative 11%. We have three negative C$ reports, and the loonie gains almost 100 pips against the USD. With currencies however, one is trading against the other, so we need to examine the drivers on the USD.
This week it seemed to me the negative attitude toward the USD accelerated after the US Trade Balance fell short of expectations. Though not a bad number, some of the market analysts suggest the shortfall in exports would tilt the US 1Q GDP back into negative territory. The premise the US will enjoy vigorous growth in 2Q had now become subject to further review.
The economic recovery is now about five years old, quite mature as recoveries go. During this period there has been a vigorous expansion of the money supply used as a stimulant. Now the Fed through their monthly reduction in their bond purchases is reducing the size of their stimulant. Does this mean the economy can continue to grow on its own or has the recovery run its course?
But there is more to an economic recovery than just monetary policy and this is where the US may be falling short. Two recent articles make this point. A Washington Post story reports about the diminished entrepreneurial efforts in the US:
The American economy is less entrepreneurial now than at any point in the last three decades. That's the conclusion of a new study out from the Brookings Institution, which looks at the rates of new business creation and destruction since 1978.
Not only that, but during the most recent three years of the study -- 2009, 2010 and 2011 -- businesses were collapsing faster than they were being formed, a first. Overall, new businesses creation (measured as the share of all businesses less than one year old) declined by about half from 1978 to 2011.
This report was from the left leaning Brookings think tank who reported their findings. It is amazing what high taxes and excessive regulations can do to the entrepreneurial spirit.
The conservative Larry Kudlow offered some of the reasons he felt recovery was feeble. He said:
This is an anti-business administration. It won't sign off on the Keystone pipeline. Its centerpiece policy, Obamacare, penalizes the 50th worker for the 30th hour worked, with huge mandated cost increases and/or tax hikes. Who's going to make a long-term investment with that hanging over their heads?
And then there's the failure to reform, or better yet abolish, the corporate income tax - including immediate cash expensing for new investment and an ultra-low tax penalty to repatriate U.S. profits sitting overseas. Take a look at the Big Pharma Pfizer-AstraZeneca deal. If Pfizer dilutes its U.S. ownership to less than 80 percent, the headquarters of the newly merged company could be based in London. Why? Because the British corporate tax rate is heading for 20 percent while the combined U.S. federal-state corporate tax is 40 percent. Do we like this tax gamesmanship? No. Can you blame Pfizer, which wants to enhance shareholder value?
More USD bears may have come from hibernation this week, wanting to sell the USD at a time when a few fundamental C$ reports were being released. There were already ample USD bears. Our last COT report shows if the short JPYUSD positions were excluded, the report would show specs short 81,317 contracts on the USD. This makes the USD the specs' second favorite short after the yen.
We suspect there was heavy buying of other currencies and selling the USD on Tuesday. After reviewing the volume and open interest report from the CME, this was confirmed. This report shows a very active day with OI going up 8,067 contracts in the pound, 4,846 euro contracts, and a whopping 5,479 contracts in the SF. The increase in the SF is almost a 10% increase in the size of the market in just one day!
The bottom line here is the USD weakness took precedence over the shortfall in the Canadian numbers. If indeed the US economy is faltering, this will hurt the Canadian economy. With a population of less than 35M, the industrial sector of Canada needs an export market. Over 70% of their exports go to the US and a slowdown in the US economy would hurt their northern neighbors.
Energy is the biggest Canadian export. The recent balance of trade report showed a 7.9% reduction in the value of energy exports to 11.2B (C$) in March. Canada does have the third largest global reserves of crude but lacks transportation to move it to markets.
Canadian Prime Minister Harper has visions of making Canada an energy super power but there is determined opposition. President Obama has blocked the Keystone XL pipeline going south through the US. Various groups are loudly opposed to the Northern Gateway pipeline to the Pacific in British Columbia.
Canada also has huge natural gas reserves, but they are late in the race to convert the gas to liquid and ship it to the hot Asian markets.
Time should cure some of the marketing problems confronting Canada's energy sector. For the industrialized Eastern Canada area, they need help from a stronger US economy and a weaker loonie. To this end, the new Bank of Canada Governor Stephen Poloz is thought to be well aware of the currency problem.
We are wary the USD bears will find reason to continue the selling, however, the lonnie strength seems out of place. At 1.09 (USDCAD, FXC, UUP, UDN) or less we want to be a buyer of the USD versus the Canadian. As always manage your money.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.