Loonie Absorbed in Shakespearean Drama That TD Sees Ending Badly

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More than stabilizing oil prices and job creation, the Canadian dollar has something else in its corner right now: history -- and maybe prophecy.

The loonie is one of just three currencies among the Group of 10 nations to rally against the U.S. dollar this month, following a streak that’s seen its March weakness reverse in April for 12 of the last 16 years.

The trend was this year dubbed the “Julius seizure” by Shaun Osborne, Toronto-Dominion Bank’s chief currency strategist, after the U.S. dollar hit its six-year high against the loonie right around the “Ides of March,” as made famous by William Shakespeare’s play, in which a prophecy cryptically warns Julius Caesar to beware March 15. In Caesar’s case, it’s the date of his assassination. For the Canadian dollar, Osborne says it might have been the start of a rally that even the Bank of Canada’s interest-rate setting meeting Wednesday can’t upset.

“The risk is toward some dollar softness, or relative Canadian dollar strength, from a short-term point of view,” Osborne said in a telephone interview, adding he expects the loonie to resume its descent in the longer term. “The Canadian economy at this point seems to be holding up relatively well.”

The loonie, named for the image of the aquatic bird on the C$1 coin, has gained 0.8 percent versus its U.S. peer this month. That’s the best performance among its developed-nation counterparts, according to data compiled by Bloomberg. It was at C$1.2583 to the greenback at 8:19 a.m. in Toronto.

Rate Insurance

The local currency weakened to a six-year low of C$1.2835 per U.S. dollar March 18, after the Bank of Canada sent it into a tailspin with an unexpected interest-rate cut in January that it called insurance against the collapse in oil prices, the nation’s biggest export.

With oil since recovering from its lows and the Canadian unemployment rate holding steady in March, economists are forecasting the central bank will decide it has enough of a cushion for now. All 17 estimates in a Bloomberg survey are for the benchmark interest rate to stay at 0.75 percent at the central bank’s rate announcement tomorrow.

While TD’s Osborne said he still sees the loonie weakening later in the year, with the Bank of Canada likely to cut rates again just as the Federal Reserve starts doing the opposite, he said oil’s stabilization and recent better-than-expected economic data are lining up for a near-term rally.

Job Growth

After touching its own six-year low of $42.03 per barrel March 18, the benchmark price for North American crude oil has risen to about $52 per barrel. At the same time, Canadian employment has rebounded. The economy added 28,700 jobs in March, after losing 1,000 in February, data released last week showed. The jobless rate held at 6.8 percent in March.

While TD’s Osborne predicts the loonie will resume its fall later in the year, and continue falling until the beginning of next, reaching C$1.33 per U.S. dollar, other observers are getting ready to call a recovery.

“We are bouncing along the bottom,” David Rosenberg chief economist at Gluskin Sheff & Associates, said by phone from Toronto on Monday. “The Canadian dollar has finally moved into a zone you can officially say is cheap, not dirt cheap, but cheap.”

The loonie is below the C$1.2131 per U.S. dollar average price since 1971, data compiled by Bloomberg show. With the median forecast in a Bloomberg survey calling for the loonie to bottom out at C$1.29 per U.S. dollar in the third quarter, it’s only about 3 cents off that now.

Repatriate Assets

For Roland Chalupka, that’s close enough.

The Toronto-based asset manager, who oversees the equivalent of $795 million for wealthy individuals at Fiduciary Trust Co. of Canada, is investing in his own country again after spending the last three years moving money abroad to avoid the currency’s 20 percent collapse.

“While we can’t catch the last few cents or the last penny or two, we do look at long-term trends, and that long-term price is definitely on our radar,” Chalupka said. “A Canadian investor like ourselves, over the longer term, we’re going to have to rebase things in Canada.”

Chalupka is starting off buying the country’s bonds again. He assigns about a 50 percent chance the Bank of Canada will cut borrowing costs again this year, about the same swaps traders give, according to Bloomberg calculations. That will help Canadian bonds. And though it may mean the currency falls a bit more, for Chalupka, there just isn’t too much further to go.

“We’re just less bearish on the Canadian dollar,” he said. “So to take Canadian dollars and put money into undervalued areas of the country, as a long-term investor in Canada, that’s not a bad risk reward if the rest of the world doesn’t think it’s a particularly good time to do so.”

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