If you listen to the pundits, the biggest issue facing Canadian investors isn’t the market, it’s the Canadian dollar declining against the US dollar. Everyone is calling for the Loonie to drop. And why wouldn’t it?

• Canada’s economy is much weaker than the US
• We seem rudderless with regard to government
• Foreign investment is at record lows
• And perhaps most significantly, it appears President-elect Trump is going to immediately apply a 25% tariff against all Canadian exports shortly after his inauguration on January 20^th.

 

One reason the Loonie might be close to its bottom is that the market may have already priced in all this bad news and only good news is left. Just take a look at the chart below – the net short position on the Canadian dollar is the largest it has been in decades (by a significant margin). This means everyone is betting against the Canadian dollar. This is a very good contrarian indicator (when everyone bets on the same thing, the market usually goes the other way).

 

Now just imagine if:

• Canada negotiates tariffs down from the expected 25%
• The Bank of Canada doesn’t cut rates at the next meeting (or has fewer cuts than expected this year)
• We have a change in government that is more friendly to foreign investment
• (Heaven forbid) we have a tax cut!!

 

My point is that there is a lot of negative news priced into the Canadian dollar right now, with some potential upside surprise. I guess we will find out over the next 60 days!

 

 

I have also included the latest article from our CIBC Economics team entitled “In praise of the Fed”

 

As always, if you have any questions, please feel free to give us a call.

 

Have a great weekend.

 

Milan