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Briefing highlights

  • Why the loonie's shining brighter
  • Where analysts see the currency
  • Markets at a glance
  • Canada's trade gap narrows
  • Lululemon surges after earnings
  • U.S. job growth slows, rate dips
  • Vancouver home sales edging back up

Shining brighter

There’s something to be said for an upbeat outlook based partly on the fact that things can’t get much worse.

That’s certainly one of the reasons behind a suddenly brighter picture for the Canadian dollar.

Observers believe that the loonie, now at about 74 cents (U.S.) though it's softer of late, may have hit bottom, though the caveats surrounding that are many.

For now, stable oil prices, a stronger economy, a less dovish central bank and a U.S. dollar that may have topped out are all reasons for a loonie with some wind under its wings.

And, yes, the feeling that it can’t get much worse where record shorting of the currency is concerned.

“With the USD having neared our Q2 target of 1.40 at the start of May, we have to ponder how much more downside risk there is in the CAD at this point,” said Shaun Osborne, Bank of Nova Scotia’s chief foreign exchange strategist, referring to the U.S. and Canadian dollars by their symbols and a second-quarter forecast for the loonie at just below 71.5 cents.

“Our answer is, probably not that much – we think we might have seen the top of the USD bull cycle in early May,” Mr. Osborne added.

“The CAD may not improve that much in the near term but downside risks do seem to be diminishing a little.”

This would seem to be at odds with the feeling among speculators, who have been placing ever-higher bets against the loonie.

According to the latest report from the U.S. Commodity Futures Trading Commission, the net short position against the currency stood at a record $7.3-billion.

And should the loonie bolt higher, the squeeze on those speculators could feed that rally.

“Any [Canadian dollar] appreciation could be amplified as speculators reverse their short positions,” National Bank of Canada senior economist Krishen Rangasamy and chief economist Stéfane Marion said in a report.

“Indeed, looking at the record speculative shorts on the Canadian dollar one could argue that, assuming the economy stays on track, it’s becoming more and more difficult to top that level of pessimism on the Canadian dollar.”

Observers such as Scotiabank’s Mr. Osborne believe speculators are, in fact, on the wrong side. True, the loonie is among the weakest major currencies so far this year, but is just about flat against its U.S. counterpart.

“Short sellers are perhaps being a little myopic and focusing only on some signs of softness in Canadian housing (nothing significant at this point) and clear stress in the relatively small alternative home lender space,” Mr. Osborne said in an apparent reference to the recent turmoil at Home Capital Group Inc.

“These issues are unlikely to lead to significant problems, we feel,” he added.

“At the same time, crude oil prices have recovered from the early May weakness and domestic growth trends remain relatively strong. Inflation remains low and we think the risk of a Bank of Canada rate increase remains very remote at this point but U.S.-Canada spreads have steadied.”

Mr. Osborne sees the loonie at about 73.5 cents through the second half of this year, about a penny higher early next year, and almost 77 cents by the close of 2018.

Mr. Rangasamy and Mr. Marion forecast a 76-cent currency by the end of this year, with a rise of a penny by early 2018 and then another dip.

These calls could depend, of course, on oil prices and how many times the U.S. central bank raises interest rates, along with the tone and outlook from the Bank of Canada.

Looming, too, is the renegotiation of the North American free-trade agreement, coming, as it does, amid rising tensions between Canada and the U.S.

“Our base-case scenario assumes U.S.-Canada trade flows remain largely unaffected by NAFTA renegotiations and that the federally-approved Trans Mountain pipeline gets built in British Columbia,” Mr. Rangasamy and Mr. Marion said.

“Those assumptions will be tested over the coming months amidst an increasingly mercantilist-sounding Trump administration in the U.S. and the NDP/Green party alliance in B.C. which aims to topple the province’s current government and oppose the construction of the pipeline.”

Trade gap narrows

Canada’s trade deficit narrowed in April as the rise in exports outpaced that of imports.

The trade gap narrowed to $370-million from a revised $936-million in March, Statistics Canada said today.

Exports climbed 1.8 per cent, and imports 0.6 per cent.

Worth noting, too, is the fact that Canadian trade is now at a record level, up 10.9 per cent to almost $96-billion in April.

“While the healthy gains of the first quarter

Markets at a glance

Lululemon surges

Shares of Lululemon Athletica Inc. are surging after its quarterly results late Thursday.

The retailer’s first-quarter profit slipped, and revenue rose, and it announced plans to shut about 40 of its 55 Ivivva stores.

Profit fell to $31.2-million (U.S.), or 23 cents a share, from $45.3-million or 33 cents. Adjusted earnings per share rose to 32 cents from 30 cents.

Lululemon also forecast revenue of $2.5-billion to $2.6-billion and earnings per share of $1.97 to $2.07 for the year.

“The big takeaway from the 1Q release is that business has improved significantly in 2Q,” said Citigroup analyst Paul Lejeuz.

“The many fixes/initiatives, such as new visual [marketing], new product launches and the addition of colour to the assortment all seem to be driving better trends,” he added.

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