The Diving Loonie

January 15, 2015

Charts created using Omega TradeStation 2000i.  Chart data supplied by Dial Data

Yes loons dive. Canada’s iconic bird is featured on stamps and coins. The picture of a loon on Canada’s $1 coin earned it the nickname of “the loonie”. Those who have visited Canada’s lakes are familiar with the sound of loons. There is hardly a lake in Canada that would not be the same without the sound of the iconic loons. Oh yes they also dive. Loons dive to get their food. Ok they are not in the same class as cormorants but they can hold their breath for upwards of 90 seconds.

But this isn’t about Canada’s iconic bird. It’s about another kind of loon. The Cdn$ aka “the loonie”. And it has been diving. No word that it is going down to find food though. And unlike the loon the loonie appears to be able to hold its breath for months.

The decline of the loonie got underway in May 2013. The loonie broke down from what appears as a possible large head and shoulders top pattern. The decline initially was slow but picked up pace in the latter part of 2013 falling from around 0.97 to under 0.90 by March 2014. At that point, a strong rebound got underway and by July 2014 had recovered to around 0.94. With collapsing oil prices, the loonie started a steep decline currently falling to around 0.8350. Since hitting a high near 1.06 in July 2011 the loonie has lost roughly 21% against the US$. But is it now approaching a potential bottom? The potential objective from the head and shoulders top pattern was 0.8350. The loonie is there.

The reasons for the decline of the loonie are varied but in the early going it appeared to be Canada’s relative economic underperformance as compared to the US. The most recent decline is attributed to collapsing oil and commodity prices. Canada is a major exporter of oil and with a collapse in oil prices from $107 to $45 it has had a negative impact on Canada. Already job losses are being seen in Canada’s western oil patch (Suncor Energy (SU-TSX) announced that 1,000 jobs are to be cut along with about $1 billion to be cut from its capital budget). Some are predicting that Alberta could soon enter a recession. The oil price collapse could have a negative impact on the housing market.

The collapse of oil prices has also negatively impacted tax revenues for oil producing provinces (Alberta, Newfoundland, Saskatchewan) as well as the Federal government. Alberta’s surplus has been wiped out. Newfoundland’s deficit is growing. Saskatchewan is experiencing problems and some are predicting that the Federal government’s balanced budget is in deep trouble with potentially two more years of deficits. How the Federal Government who had promised a balanced budget by election 2015 in October will respond is anybody’s guess.

But collapsing oil prices and loonie are not all bad. Both Ontario and Quebec could benefit from lower oil prices and a lower loonie as it could help their export sector. With the loonie holding higher in recent years Canada’s exporters should be more productive now and a lower loonie should work to their benefit. On the other hand, snowbirds and others who like to travel to the US are no doubt paying higher prices. Canadian professional teams in hockey, basketball and baseball are also facing a higher bill as they pay their salaries in US$.

It has not just been oil prices that have been falling. Other commodity prices are falling as well. Copper prices have fallen 21% since the high of 2014. Copper has fallen 8% in 2015 thus far. Many are pointing to the falling copper price as a sign that the world economy is tipping over. The TSX Metals & Mining Index is down almost 23% in 2015, the TSX Composite is down only 5%. Commodity prices are priced in US$. With the Cdn$ down the fall in commodity prices expressed in Cdn$ has not been as steep. Since December 31, 2014 oil prices have fallen $7.38 or 13.9%. But in Cdn$ oil prices have only fallen $6.97 or 11.3%. The loonie may be diving but it is softening the collapse in commodity prices.

Oil expressed in Cdn$ has a potential objective down to between $40 to $45 based on the topping pattern that formed between June 2009 and October 2014. That suggests that oil in Cdn$ has more distance to fall. Since oil in US$ also has a target zone of $40 to $45 the fact that oil in Cdn$ also has that target zone then oil in US$ could have even further to fall under $40. Or the currencies have to even out. Either way it suggests the potential for more pain ahead in the oil market even if it does rebound for a period. A collapsing oil price along with collapsing commodity prices is deflationary.

Charts created using Omega TradeStation 2000i.  Chart data supplied by Dial Data

Since December 31, 2015 gold prices have rallied $50.40 in US$ terms or 4.3%. But expressed in Cdn$ gold prices are up $101.98 or 7.4%. In 2014 gold was only down against one currency – the US$ and that was only a small 1.5%. Against the Cdn$ in 2014 gold was up about 6%. This is significant because what that meant was that gold was up in 2014 against all currencies except the US$. Since the beginning of the year gold is rising in US$ even as the US$ continues to rise against other currencies.

Gold expressed in Cdn$ may be poised to make a major breakout. Gold in Cdn$ recently broke above a downtrend line from the 2012 high. There is a second downtrend line from the 2011 high. Gold in Cdn$ would need to breakout over $1,515 to take out that trendline. A breakout over that level could be significant.  A projection for gold’s price in Cdn$ could be up to $1,900 or even up to $2,200. Those prices are gold expressed in Cdn$ but it does not say anything about the US$ exchange rate.

For comparison sake gold in US$ could be on the cusp of breaking above the downtrend line from the 2012 high. That line is currently at around $1,240 although a breakout over $1,280 would confirm. As to the downtrend line from the 2011 high, gold needs to breakout over $1,525.  With gold in US$ currently hovering just below $1,240 the gold market could be on the cusp of either a significant breakout or failure.

Charts created using Omega TradeStation 2000i.  Chart data supplied by Dial Data

A bull market for gold would suggest that gold would need to be rising in all currencies. With gold now rising in US$ even as the US$ continues to rise is a potential significant development. However, there is considerable work to be done by gold before a real bull market emerges. Failure at any of the above levels could suggest a return to test the lows or even new lows.

The loonie is quite oversold here. But that doesn’t mean it’s about to rebound. Oil is also grossly oversold here and it is possible a rebound could be get underway. But for both the loonie and for oil there are few if any signs of a bottom. The Cdn$ needs to recover above 0.90 to even suggest a potentially stronger rebound. A break under 0.8250 might suggest a move down to 0.80 or even 0.77. During the 2008 financial crash, it took several weeks before the loonie found its footing and started to take flight again.

The loonie is diving. But gold in Cdn$ is rising. Gold is rising against a host of currencies. The initial rush everywhere has been into US$. But when gold starts rising in US$ even as the US$ continues to rise against other currencies it is a sign that there are potentially deeper problems brewing. There are few predicting that the oil price collapse might not have negative repercussions for the global economy. The same can be said about falling commodity prices and falling currencies. What needs to be understood is that all of this is suggesting that something is deeply amiss and currencies and by extension the central banks and governments are not being trusted. With gold now rising in US$ terms as well it could be the final nail.

Copyright 2015 All rights reserved David Chapman

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