Whether it’s my trader friends in Sydney Australia, or my very own neighbors in New York city, the talk this Fall has been about how … well there is no Fall so far this year. As I sit here in the office just a few days before Thanksgiving… enjoying the warm sunshine of yet another 60 plus degree day…. and as my Aussie friends frantically message me about the 100 degree summer swelter Down Under, one thing is clear; this has been no ordinary Fall/Spring around the world.
In fact, the weather has been so mild this season, that Goldman Sachs actually lowered their near term oil forecast to $20 per barrel, on the assumption that the demand for heating oil will plunge if temperatures remain unseasonably warm for much longer. Whether Goldman is right remains to be seen, but for now, the price of oil is stuck in the low $40’s and that can only mean bad news for Canada – the most oil-sensitive economy in the G10 universe.
Little wonder then that the Canadian dollar, affectionately known as the loonie, is trading near multi year lows at 75 cents to the buck. Canada is not just some blue-eyed version of Saudi Arabia (as some loonies shorts like to derisively refer to it). The economy up north is well diversified from the tech enclaves in Toronto, to the entertainment and retail startups in Vancouver… to even some industrial might in the perennially mismanaged Quebec.
Nevertheless, 25% of its economy is directly or indirectly dependent on energy.
With oil prices in what appears to be permanent state of funk, growth in the Great White North has been lackluster at best. Canadian GDP, after contracting for the better part of this spring and summer, finally turned positive in the past three months eking out 0.1% to 0.3% gains as the pick in US helped fuel demand.
However, if oil prices were to plunge even further this winter, it’s difficult to see how Canada could avoid another contraction. Of course, weather has not been the only factor in crude’s decline. Fundamentally, the primary reason for the sharp drop in oil has been the relentless pumping of crude by the Saudi’s who are desperately trying to put the American fracking industry out of business. It’s a war of attrition with Canada effectively being the bystander casualty.
Yet the Saudi’s may have miscalculated in their assessment of US fracker’s ability to stay alive. Meanwhile they are burning through their currency reserves at a very dangerous pace and are running budget deficits of 20% of GDP. Such policies are unsustainable and there is talk in the market now of Saudis and Russians coming to some kind of an agreement on production that would curb the supply overhang in the market. Still, if the weather is warm and no one needs heating oil, the price of crude could tumble below $40 per barrel and take the loonie with it.
There is however one other counter narrative to the short Canadian dollar thesis. Last month, Canada elected Justin Trudeau who, with his movie star good looks and political pedigree, instantly became the most glamorous leader in the G-10 union. But aside from his beautiful wife and picture perfect family, Mr. Trudeau is also bringing something new and not seen in the Western world since the early days of the Great Recession – a policy of fiscal expansion.
Flying in the face of today’s economic orthodoxy that has seen Western governments adhere to fiscal austerity for the better part of the last seven years, Mr. Trudeau has promised to run budget deficits in order to jump start the moribund economy and beef up its infrastructure. Granted the 10 Billion Canadian Dollar (CAD) in deficit spending is laughably quaint by US standards; but the Canadian economy has only one tenth the US population and even such a small stimulus might have some positive impact on Canadian growth. More importantly, its focus on infrastructure could help the one sector that needs it the most – the resource strewn province of Alberta where the decline in commodity prices has had the biggest negative impact.
So in the short term, its is indeed possible to see the loonie lose more value… but the drop may be limited. As it approaches its multi decade lows near the 70 cent mark, it will likely find some serious support. And, unless oil remains at $30 per barrel for the better part of next year, that figure may well mark the bottom for the Canadian dollar and offer long term traders a great opportunity for a bargain entry.
Until next time,
Mr. Schlossberg is a weekly contributor to CNBC’s Squawk Box and a regular commentator for CNBC Asia and CNBC Europe. His daily currency research is quoted by Reuters, Dow Jones, Bloomberg and Agence France Presse newswires and appears in numerous business publications and newspapers worldwide. Mr. Schlossberg has written articles on trading for SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is the author of Technical Analysis of the Currency Market and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game, both of which are published by Wiley. Boris’ extensive experience in trading and developing momentum based techniques provide the foundation for BKForex’s strategies.