It has been a relatively good run for those long US dollars against Canada over the last few weeks. Since mid-April that trade is up almost 3%. But it seems like it should have paid out even more. This last week alone our buck took some pretty stiff body blows from all sides.
Hitting below the belt, Trump sacrificed Canada in order to score some political points with his constituents ahead of his first 100 days in office. His voters can now be rest assured that their boy is serious about America coming first following the imposition of tariffs on softwood lumber, threats to tear up Nafta, and rumblings from his toadies about Canada’s unfair subsidies on everything from dairy to aircraft. This pressure is not likely to end until negotiations begin.
Adding to the gloom, our dollar is getting no support from energy nor does it appear that soggy oil prices are going to rebound any time soon.
The domestic financial news was not friendly to the loony either. Those who have been shorting the Canadian housing market for years, suddenly had something to chew on. Home Capital Group, a small firm focused on providing mortgages to lower credits, ran into trouble with the regulators. The basis of the regulator’s concern was with respect to making false claims, not the credit worthiness of the mortgages they are exposed to but the action did spur a sharp increase in deposits being pulled. To try and get ahead of any liquidity problems, Home Capital set up a $2.0 billion line of credit with a large domestic pension fund. The fund, God bless them, agreed to provide the first $1 billion at an effective rate of over 22%. For HCG, the lifeguard just threw them a life preserver that weighs two tons.
As we all have learned from 2008, system liquidity is all about confidence and perception and is based less on audited financial statements. Although the likelihood of contagion to the broader markets from the troubles at HCG is extremely low, the rapid increase in credit spreads at other firms in the same business tells us that the contagion risk is not zero.
Finally, the release of GDP for February was not horrible for the currency, but it does give one pause, coming in flat for the month. The breakdown underscored how dependent the economy is becoming on housing to generate any of the growth we are seeing. Real estate, rentals and leasing grew by 0.5% in the month led by a 5.3% gain in output of real estate agents and brokers, mainly as a result of gains in the GTA. At the same time, construction was the only sector in the goods producing side of the economy that showed an increase in the month at up 0.5%.
So we have an economy whose growth will continue to be plagued by uncertainty around US protectionism, will likely get little support from oil prices, and is becoming more vulnerable to a housing correction at the same time that measures have just been taken to slow home price increases. And don’t forget financial stability concerns surrounding Home Capital.
In brief, the fundamental reasons that justify being short Canadian dollars against the US remain. With a Central bank extremely reluctant to move on rates, it looks like this trade still has room to run.
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