Earlier this month I wrote that, the Canadian dollar suddenly has everything going for it and highlighted a head-and-shoulders top in USD/CAD.
Since then, USD/CAD has fallen 300 pips, though it still remains about half-way to the 1.30 target.
USD/CAD bounced earlier today as oil prices fell but crude has since turned around. From a low of $84.06, it's up to $87.00.
The IAE was out with its 2023 forecast today and sees growth of 1.6 million barrels per day with supply growing 740k bpd. They also warned that Russian oil output could fall 1.4 mbpd next year.
As for the December G7 oil price cap, we still don't have a price.
As for Canada, today's manufacturing sales numbers were better than anticipated but housing remains a major risk.
Overall, I see five big tailwinds for the loonie as we begin to look towards 2023. I spent nearly all of this year warning that USD/CAD would hit 1.37-1.38 and that's precisely what happened. Video from June:
1) Welcome signs of a peak in inflation and interest rates in the US
The market reaction to Thursday’s CPI report was remarkable but it wasn’t just the data. The market took it as a signal that US inflation is sinking and that the Fed won’t need to hike above 5%.
2) A peak in the US dollar
The Canadian dollar appears strong in the past week but it’s primarily a reflection of US dollar weakness. Bank of America’s fund manager survey showed US dollar longs were the most-crowded trade in any asset. There is a significant potential for an unwind and this may be just the start.
3) China covid easing
China’s top leaders once again highlighted adherence to covid zero policies today but top leaders area increasingly running up against political and social fatigue to lockdown measures. Just like in mid-2020, the market is increasingly looking beyond covid and that will kickstart Chinese and global growth, boosting demand for commodities.
4) US infrastructure spending
The US infrastructure bill is a year old but much of the spending doesn’t kick off until 2023. That program is huge and will drive demand for raw materials. It will also ensure that North American growth outperforms the rest of the world.
5) Energy
There simply hasn’t been enough investment in oil and gas over the last 5 years and now the world is short. It means that oil and gas prices will stay high and Canada will continue to benefit. Moreover, Canadian industry benefits from cheap, reliable power while European industry struggles.
The big caveat remains housing. Lately, I'm seeing signs of stabilization but I'm not sure if consumers are adjusting or there's a bit of a sellers' strike. The dramatic fall in the number of transaction is a reason for caution from me but so far Canadian consumers appear to be taking the destruction of paper wealth in stride.
