Towards the end of September, a notably bearish technical pattern emerged in Nymex oil futures prices. This ‘head and shoulders’ configuration – a widely acknowledged precursor to an accelerated, near-term continuation of trend – not only threatened an interim retreat in oil prices but, by extension, a correction in one of the clearest beneficiaries of spiralling oil prices of late – the Canadian dollar (CAD). Now, however, with this bearish technical pattern incomplete, perhaps one of the few clear risks to the CAD’s continued outperformance has been removed.
The CAD has already gained around 8 per cent against the US dollar since its lows for the year back in May and it has been supported by a heady mix of rising energy and commodity costs, strengthening economic momentum, fiscal and current account surpluses and a central bank in the foothills of a monetary tightening cycle. However, the economy continues to perform well and recent data releases from Statistic Canada underline that very fact. Retail sales rose 1.5 per cent month-on-month in July to beat expectations (of 1.2 per cent) and were complemented by an upward revision to June’s rise of 1.1 per cent (to 1.3 per cent).
The data was ample confirmation that the Canadian economy has continued to gain momentum following the steady GDP growth rates recorded over the preceding two quarters (GDP grew by an average 2.2 per cent quarterly-annualised over this period). With the economy continuing to perform in this way, the Bank of Canada’s concerns over the economy’s remaining spare capacity are unlikely to have abated – particularly following August’s CPI report, which yielded a headline annual inflation rate of 2.6 per cent – up markedly from 2.0 per cent. Accordingly, we expect that the Bank’s expressed view that monetary policy remains stimulative is likely to resonate in the run up to the Bank’s next rate-setting meeting on 18 October.
If positive economic credentials and the prospects of rising interest rates were insufficient to underpin the enthusiasm of CAD bulls, then consider the following: with the foreign exchange markets home to concerns over the global inflation outlook, gold continues to attract steady demand. And Canada is one of the few countries that contribute to the annual production of the yellow metal (5.3 per cent of global output as of the end of last year). Moreover, over the past decade, the unit is one of only two currencies that have demonstrated a consistently high correlation (86 per cent) with the gold price (the other being the Australian dollar (AUD) at 79 per cent).
With the gold price continuing to look well supported, we find this yet another reason to sing the praises of the CAD. Indeed, although still some way away, the CAD’s all-time highs (1.1198 in November 1991) certainly seem attainable. It is perhaps unsurprising, therefore, that foreign investors have shown a marked increase in enthusiasm for Canadian equities. Statistics Canada recently reported that foreign investors returned in July with their largest investment of the year, buying $3.3bn worth of Canadian securities. And the Bank of New York’s iPFM data show a marked acceleration in inflows into Canada’s equity markets over the past month or so – as the chart above shows quite clearly.
Neil Mellor is a currency strategist at the Bank of New York.
Researched and published in association with The Bank of New York.
