I'm Loonie for the Dollar

I love me a pun.

If you didn't know, the nickname for the Canadian dollar is the Loonie.

No idea why.

But I checked out the chart below earlier today and it started to spark some ideas off...

The bottom line here...

There is no way that Canada can raise rates without totally ruining the Canadian housing market.

So there's a very simple thesis here.

Who has the greater capability to raise rates, the US or Canada?

Now, I don't think rates will rise too drastically anywhere, if at all - markets would shit themselves and we know that markets remaining stable are factored into decision making these days.

But it's about perception here.

And I reckon we see a gradually higher yield spread in the midterm between Canadian bonds and US bonds.

Let's also pay attention to the following...

Here's EEM, the emerging markets ETF (incl. China) vs DBC, the commodities ETF.

Clearly, commodity price is driven by emerging market but more specifically, Chinese demand.

Now, if we were to take this as a proxy for commodity currencies vs USD, we'd find that commodity currencies recently have been decreasing in price vs USD because of demand side factors in EM.

I've been talking a lot recently about Chinese issues, and I'd argue that the collapsing credit impulse there, combined with greater uncertainty about who the CCP will target with certain reforms/sanctions/punishments is leading to dampened demand...

None of which is good for said currencies.

As we know, Canada is a massive oil producer, and with recent OPEC statements leading to production increases, I'd argue that oil is looking to be negatively impacted going forward.

The tweet in the screenshot above was from when the Saudis & OPEC reached an agreement back in July.

Funny how trendlines work, right?

Based off the demand issue, I'd argue that oil is looking to tick down lower over the coming months, leaving CAD exposed to the downside as well.

And coupled with the growth story seemingly peaking, I would be inclined to be further bullish USD as the world slows down and takes stock of the post-COVID global economy.

And I say 'post-COVID' with an air of optimism, since it really is still here.

Check out our dollar smile framework to remind yourself of the relationship between growth and USD.

After today's US and Eurozone PMI prints, I reckon we're firmly moving into the left third, not quite fully into it, but getting there.

We had readings of 55.2 (lowest since December 2020) and 62.7 in Germany (five month low) and 59.5 for the Eurozone composite.

Are we now seeing the data reflect the reality of the next 6 or so months?

My thinking is that we are, and CAD will not be a benefactor of this.

Below are some levels I'd be focusing in on, with the green/grey box being where I'd like to initiate an initial position.

I don't think we're QUITE at the stage in which I'd like to lift some, but we're getting there.

Something I like to see in a market is where a prior high is respected pretty much to the tick, and that is what we have seen at the dashed line.

This tends to mean, for me at least, that the level is just waiting to get picked off, and above there, I reckon there's clear space for the dollar to really make a broader comeback.

Quick post today, but I reckon there's some legs here.