Are the Tides Turning for the Canadian Dollar?

In 2007, the Canadian Dollar was named Time Magazine’s Canadian Newsmaker of the year. Having hit a high of 0.9059 against the US dollar, it smoked its US counterpart. At the time, the Loonie skyrocketed because of a booming economy and skyrocketing oil prices.

However in the second half of 2008, the tides are beginning to turn as the Canadian economy starts to feel the pain of slower US growth. Retail sales grew 0.4 percent in the month of May compared to 0.6 percent the previous month. However if you strip out the contribution from higher gasoline prices, consumer spending only increased by 0.1 percent.

Canadian consumer confidence dropped to the lowest level in 13 years as the labor market takes a turn for the worse with the unemployment rate rising to 6.2 percent, the highest since January 2007.

Cloak will be Lifted….

The Canadian economy is at the cusp of a more major turn with the recent drop in oil prices. For a long time the rise in oil prices have been masking an export recession in Canada. Now that oil prices are trading below $125 a barrel, the cloak will be lifted and the true vulnerability of the Canadian economy will be exposed. Lower oil prices and slowing growth will be bad news for the Canadian economy.

But Canada is Still Faring Better than Everyone Else

Weaker Canadian economic data should send USD/CAD higher because the US dollar has already become grossly oversold. However, Canada is still faring better than many of its G10 counterparts. Expect CAD/JPY, EUR/CAD, NZD/CAD, GBP/CAD to move lower in the coming months as we see greater deterioation in the Eurozone, UK and Canadian economies.

Expect the correlation between oil prices and the CADUSD to continue to hold:

Comments

[kashirin:]

where does he get all those permabull bs all the time?
the worst author on seekingalpha.

canadian dollar reached the parity in september and ignored run up in oil and other commodities during this year
if something is oversold it's CAD
by the way oil is above $125 right now

2008 Jul 28 09:01 PM

[bearfund:]

Canada would do well to divest itself of any attachment to the US. It has the natural resources; it's time to start walking up the value chain. The US cannot and will not invest what's needed to make that work. How about doing it yourselves? I'm tired of watching Canada parallel the Us on account of a bunch of carmaker suppliers. How about you go make your own fortune for a change?

2008 Jul 29 01:13 AM

[NOWHEREMAN:]

Canada can live and live quite well without the US. The same can not be said for the US.

Be very careful how you treat Canada, they are our primary "Foreign" oil supplier.

2008 Jul 29 09:09 AM

[Coelacanth:]

Hmmmm..... I don't follow this pair but you may be on to something here Ms. Lien.

Secretary Peters said that Americans drove 9.6 billion fewer vehicle-miles traveled (VMT) in May 2008 than in May 2007, according to the Federal Highway Administration data. This is the LARGEST drop in VMT for any May, which typically reflects increased traffic due to Memorial Day vacations and the beginning of Summer, AND THIS IS THE THIRD-LARGEST MONTHLY DROP IN THE 66 YEARS SUCH DATA HAVE BEEN RECORDED. Three of the largest single-month declines - each topping 9 billion miles - have occured in December.

To boot this is a May report and given the further increases in gasoline prices in June and July it's very plausible that gasoline demand worsened. If oil prices continue to ebb we could see a bullish USD break-out against the Loonie.

www.dot.gov/affairs/do...

2008 Jul 29 11:55 AM

[kurt walter:]

Canada's dollar had a huge run. That trade is over.

2008 Jul 29 03:09 PM