It looks like Canada's surprisingly strong run of economic data is ending, if TD Securities is right, and that means one of the fiercest rallies on record for the Canadian dollar is poised to end as well.
We may have passed "a point of peak optimism" on the Canadian economy, senior foreign-exchange strategist Mazen Issa wrote, after the release Wednesday of trade data for March in which America's neighbor to the north recorded its biggest monthly deficit on record. Exports tanked, with acute weakness in shipments to the U.S. Canada's trade surplus with its largest trading partner shrank to levels not seen since before the North American Free Trade Agreement was signed.
"We are reluctant to infer too much from the monthly swings of a highly volatile data set, but today’s international trade report from Canada provides a very strong reminder that investors should remain cautious toward the CAD’s underlying macro backdrop," Issa wrote in a note to clients.
The Canadian dollar's wild rally since mid-February hasn't been wholly a function of rising oil prices. It's also firmly grounded in the nation's better-than-expected economic performance. Issa observed that the value of the currency against the greenback has closely tracked the nation's economic surprise index for the past year.
If Wednesday's terrible trade report is a portent of what's to come, as TD suspects, the loonie's ascent may be Trudeauver. A slowing in economic growth isn't likely to elicit further monetary easing from the Bank of Canada, which cut interest rates twice following the long-term collapse in oil prices that started in mid-2014, Issa said. During a panel at the Milken Institute's Global Conference on Tuesday, Bank of Canada Governor Stephen Poloz indicated that rate cuts don't pack as much of a punch when policy rates are already so low, and have been for some time. In remarks delivered in New York City last week, the governor said the central bank would re-initiate an easing bias only in the event of a significant new shock to the economy.
The U.S. dollar on Wednesday gained more than 1 percent against the loonie, which was trading at 1.287 to the greenback as of 4 p.m. Eastern Time.
Because of the Federal Reserve's worries about the impact of a lofty American dollar on the U.S. economy, Issa doesn't think the pair is poised to make another run at the greenback's all-time high of C1.6193, or even its January peak of C1.469.
"We note, however, that with the Fed sensitive to USD strength, topside potential is limited," the strategist concluded. "For now, the 1.35 region is likely to cap the rally."