The Canadian dollar has surged of late, beyond even our own bullish projections that we made when the currency was left for dead three months ago. So as the loonie closes in on 80 cents on a U.S. dollar basis, it is time for some reflection.
For the worrywarts, it is clear that on a technical basis, the loonie is overbought. We have the Bank of Canada verbally leaning against the rapid move, and Governor Stephen Poloz is back to discussing life within a possible negative-rates environment (a completely nutty notion; it is not working overseas, and the fact that he doesn't believe there would be market distortions has to be taken in the context of a monetary official with very little Street experience).
The Canadian dollar right now is priced for WTI oil around the upper end of a $40- to $50-per-barrel price range (yet the price is barely over $40 per barrel). Quite a swing from January, when, at 68 cents, the Canadian dollar was discounting oil south of $20 per barrel.
Of course, the shorts have all covered their positions (and then some) on the Chicago Mercantile Exchange options and futures pits, so this source of buying pressure has dried up as well.
Don't get me wrong. I am still longer-term constructive on the beloved loonie – the long-run mean for the currency is around 82 to 83 cents (U.S. dollar basis) – but a near-term pullback should be expected.
More fundamentally, Canadian industry loses its competitive edge completely (looking at relative unit labour costs in U.S. dollar terms) once the currency breaks to 89 cents ($1.13 Canadian).
As it stands, only half of our newly found competitive edge has been lost with the loonie's recent ascent – unit labour costs in U.S. dollar terms at the currency lows had been driven 18 per cent below comparable U.S. levels, and that gap is still wide, in Canada's favour, by roughly 10 per cent.
Of course, the political stability, the relative growth rates, the fiscal stimulus and the Canadian banks again proving the shorts wrong (they are not real estate or energy accidents waiting to happen) are major positive underpinnings for the Canadian dollar.
If the pipeline expansion bottlenecks are ever broken (and there is a good chance of this), the implications for the domestic economy and the energy trade balance would be enormously positive for the loonie as well.
David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave.
David Rosenberg