The US calendar is skimpy, offering mostly the JOLTS report, which could be interesting for the data on voluntary job leavings. Canada reports housing data today ahead of the BoC policy meeting tomorrow. The consensus is for a rate hike, the first in seven years, because of a perceived need to pop a real estate bubble and rein in household debt. Canada does not have general price inflation. May’s CPI was 1.3%. Nevertheless, nine of ten primary dealers surveyed by the WSJ agree a 25 bp hike is in the cards. (Six see a second hike before year-end to 1%.) The swap market is pricing in a 90% probability.
Here’s the problem: Canada does not actually have broad-based inflation, just a real estate boom and a high household debt-to-income ratio. Central banks normally don’t raise rates to target a particular sector. Any yet, the BoC changed its tune only a few weeks ago and started aggressively talking about the need for tightening. A revised communications policy had to take some serious thought. Were the BoC to stay its hand tomorrow after throwing out so many hawkish hints, it would face a severe loss of confidence.
“Buy on the rumor, sell on the fact” is almost certainly going to come into play in the CAD, no matter what the BoC does. The Canadian rate hike is fully priced in by now. If the BoC retreats from the hawkish stance, the CAD falls further. But it’s going to fall no matter what on profit-taking and positionparing. See the daily chart. Both the MACD and stochastic oscillator are screaming the USD/CAD is oversold. The bond is a screaming sell, too. See the second chart.
Today the yield is 1.889% (up from 0.997% in Jan 2016), or a differential with the US of 46.7 bp. This is not negligible but it’s the narrowing that counts in FX. Then, if the BoC goes again in the fall alongside the Fed, the differential may narrow a bit more. Now see what may happen long-term on the USD/ CAD chart. A return to the last lowest low looks entirely plausible—1.2461 from May 2016. Off the left-hand side of the chart is the true lowest low off which the Fib series is drawn and it lies at 1.0620 (from June 2014). That would be a 100% retracement, yikes.
We have been dismissing the BoC rate hike idea as not something conventional central banks do. Nobody is more conventional than Canada. But those primary dealer surveys are a tipping point. We now imagine the BoC will do what it says it will do. And after a “buy on the fact” moment, the USD/CAD may continue lower. A lot lower. And notice oil is not even mentioned here. A change to higher energy prices would provide a dandy tailwind to the CAD. We get the CAD wrong more than any other currency, so take this forecast with a dose of salt.
Tidbits: In other news, Amazon Prime is holding a giant sale today with over $1 billion in sales expected, and also attacking brand names with cheaper unbranded stuff. This is seen as revolutionary but hey, Costco had it figured out a long time ago. The core assumption is that the American consumer is a slob who doesn’t care about quality, only price. Alas, this will raise prices for higher-quality items.
Also, in politics, three Trump campaign officials, including a son and son-in-law, met with a Russian promising dirt on Clinton direct from the Kremlin—in June 2016. Trump denials are not worth the air they occupy. It may be bad judgment, bad morals and even treason, but not, evidently, illegal. At the same time, the hysteria and self-righteousness of the “liberal press” is getting tiresome.
And some analysts say the dollar is moving on expectations of comments by Yellen to Congress… but they do not name what she might say that is new or even interesting that would have any effect on the dollar at all. Our take: keep watching the yield.
Finally, the real news today is from a story in the FT: the US will export more oil in coming years than most OPEC members. Now that’s a Holy Cow! moment. Oil consultancy Pira Energy forecasts the US will quadruple crude oil exports to some 2.25 million b/d by 2020, from 520,000 last year and in comparison to Kuwait at 2.1 million b/d and Nigeria at 1.7 million b/d. Bottom line, “The US will become one of the top 10 exporters in the world,” says Pira.
This arises from the Obama administration allowing exports only in 2015 and Trump embracing “energy dominance.” We should all go buy real estate in Corpus Christi, Texas. The point: the US economy is chock-full of aggressive opportunity-takers and has the resilience, skills and financing to take advantage of openings. Let’s just note that all those anti-capitalism protesters at G20 last weekend don’t have a clue.
By Barbara Rockefeller
Free Trial! Sign up for a 2-week free trial subscription to Rockfeller Treasury Services Daily Strategic Currency Briefing