If ever there was a momentum trade in FX, this is it.
Canada’s Loonie – which as recently as 2011 was trading ABOVE the US Dollar – dipped below 69 US cents in early trading Friday, hitting a low of 68.83 cents before recovering somewhat to 69.06 cents as of the time of writing.
Fundamentally, most analysts don’t believe that the value of everything-Canadian is suddenly worth 30% less than it was a couple of years ago. Canada’s energy sector has certainly taken a hit over the past year with the global decline of oil and gas prices, but Canada’s overall economy isn’t in terrible shape. And the lower currency has given the export driven sectors in Canada (other than energy) a big boost. Outsourcing to Canada has become a major sub-industry for US corporations, taking advantage of the suddenly much-lower labour costs in the country.
The question on most traders’ minds seems to be simply: How low will it go?
Turning to a historical perspective as per the above chart (source: CanadianForex.ca), the Loonie follows fairly long term trends both up and down. Cycles seem to be in years, even decades.
The last major down-cycle in the Canadian Dollar ended in 2002, with the Loonie hitting a low of about 62 US cents, before roaring back to above parity with the Greenback later last decade. There was a ‘blip’ and a fall down back to 80 cents following the 2008 financial and housing crisis (which, ironically, Canada’s economy and housing sector seemed to avoid, not having the same over-leverage in the system as did the US). And the CAD resumed its march back up to be worth $1.06 US by 2011.
Then the wheels fell off, with a momentum trade downward lasting nearly five years. So far.
Will USDCAD traders see the Canadian Dollar fall all the way back to its previous 62 cent low (or even lower) before stabilizing?
For those who think otherwise and see the large recent declines as a good opportunity to get into Loonies – there might be a trade there, but be careful, you might be trying to catch a falling knife. Which, in investment terms as in real life, can be quite dangerous.