- Speculators remain short the Canadian dollar but are market conditions changing?
- The depreciated Canadian dollar is aiding exports of energy, auto parts and capital goods.
- Wealthy potential immigrants worth billions are on the waiting list to move to Canada.
At the beginning of 2014, Canadian dollar speculators were heavily positioned for the loonie to lose to the USD. According to the COT report from December 31st, 2013, speculators had a net short of 74,495 contracts. As the new year rolled in, the USDCAD was valued around 1.06. The spec had this trade right, as the USD appreciated to the topside of 1.1220 at the end of January.
Sadly for the Canadian dollar bears, the trend has ended for the C$ versus the USD, and the trade has been flailing over a 460 pip range, redistributing wealth in the process.
With little fanfare and with no market disruptions, Canada has managed to dramatically brighten the economic outlook with a massive depreciation of the Canadian dollar over the past 12-18 months. Much, if not all, of the decline is likely behind us,
So what did change in Canada to cause the change in the direction of the Canadian dollar? In two words: Stephen Poloz. The Bank of Canada Governor has been rather vocal over the need for the Canadian economy to rebalance via less reliance on consumer spending and housing and more on exports.
But does the Canadian economy really need the stimulus a lower currency provides which will increase the exports of energy, forest products, auto parts and capital goods to the US? After all according to Rosenberg:
Canada is about the only major developed country on track to balance its books in the coming year - and is ahead of schedule. The federal government debt-to-GDP ratio is at the low end of the OECD scale, and even when you tack on the provinces (even the debt addiction region of Central Canada) the total government ratio still rivals Germany at the low end and far below the levels prevailing south of the border.
Rosenberg also notes since 2007, the Canadian economy has grown faster than the US in 5 of the 6 years, and faster than any of the G7 countries. The loonie has also benefited from foreign investors as they purchased C$27B of Canadian equities in the past six months. He feels the Toronto securities market is 15/20% cheaper than US stocks.
Bank of Canada Governor Stephen Poloz may need to confer with the more experienced central bankers, Carney or perhaps Bernanke, for advise on further measures to depreciate the loonie. If the Rosenberg analysis is correct, the days of the weak C$ are winding down.
Failure of the Canadian properties perceived bubble to pop may be another reason why the loonie bears are giving up on their trade. For years the properties bubble has frustrated the bears. Even the IMF, in a white paper has issued a warning, suggesting steps should be taken by the Canadian government to cool the market.
There are problems with this assessment. The Canadian population grew last year by 1.2%, and now is above 35.2 million. Some of the growth is immigration of the educated and wealthy looking for a better place to live. The Canadians have a program for millionaires to move to Canada and apply for citizenship. To qualify the primary applicant must have a net worth of a minimum of C$1.6M. The applicant must then loan the Canadian government C$800K interest free for five years. After these requirements are met, they then apply for citizenship.
The South China Morning Post reports there is a backlog of 45,000 Chinese with a combined net worth of C$12.9B who have applied for the Canadian program for millionaires, and want to move to British Columbia. The data is from January 2013, Total backlog for the Canada's Investor Immigrant program was 76,651 of which 57,308 were applicants from China.
The massive amounts of paper money that has been injected into the global economies often ends up in unusual places. British Columbia, it seems, is becoming the new Switzerland. It is a safe haven for the wealthy, where they are protected by laws and regulations, and the number of applicants mean this trend will continue.
Crude oil is Canada's most valuable export. Barring an unforeseen collapse in crude, which might result in a temporary loonie loss, it is hard to get very bearish on the Canadian prospects, especially with the C$ at a discount to the USD.
We wish to use weakness to sell the USD and buy the CAD (NYSEARCA:FXC).
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