What could be a catalyst for Canadian dollar gains
A market doesn't always need a reason to move but it usually does. In almost any situation, there is some kind of case to make for a currency to move higher but with the Canadian dollar, it's tough to make coherent argument for gains.
Here's a look at 7 different reasons for buying the beaten-down CAD.
Catalyst #1: Better economic data
The ultimate catalyst for a currency is growth. The problem for the Canadian dollar is that's already happened. From February to April, Canadian numbers blew away expectations. The Citi economic surprise index -- which measures how countries are doing relative to expectations -- hit the highest in a generation.
Yet what happened? Nothing, the Canadian dollar couldn't take advantage.
In the past month, the stream of strong data has ebbed so it would take at least another month of good numbers to convince the market the momentum is real. In the interim, good data won't be a sustaining CAD catalyst.
Catalyst #2: The Bank of Canada
A big reason that better economic data didn't help the loonie was because the Bank of Canada dismissed it. Poloz and Wilkins repeatedly brushed off good economic news as temporary and maintained a dovish-to-neutral stance.
With data ebbing lately, they're probably feeling good about their caution and it will take overwhelming evidence for them to shift gears.
Catalyst #3: Oil
Last week oil fell to the lowest since mid-November. It took out the OPEC-quota lows and despite intense jawboning about longer quotas, bounces haven't lasted. To make any kind of real difference to CAD, oil would have to get above $54 and that's $8 away. The ebb and flow is meaningful intraday but outside of that, crude won't save CAD.
Catalyst #4: Risk appetite
Ha! The days of risk appetite giving a boost to the Canadian dollar are gone. Unless China and emerging markets start roaring again, that's not a credible trade.
Catalyst #5: Home Capital
I think the Home Capital trade is over. The reality is that it's a small company. Even if all its deposits went bust, that's $14 billion. That's nothing in the grand scheme of the financial industry and those deposits are insured anyway.
The story with Home Capital was that brokers failed to verify loans but until that looks like a systemic problem or something else comes up, I don't think it's a factor any more. In short, we're waiting for the next shoe to drop and I'm not sure it will happen (at least in the near term).
Bottom line: If the elimination of a negative catalyst counts as a positive catalyst, then mark that down as good news for the loonie. What's it worth in USD/CAD? Not much because you still have to play defense until you know what's out there.
Catalyst #6: Trade
Theoretically Donald Trump could have a change of heart about Canadian dairy, lumber and NAFTA overall. But I doubt it.
On the weekend, Canada threatened to retaliate for US lumber tariffs so a trade war is already simmering. Again, this is a factor that could ebb but it's going to be a risk as long as Trump is President.
Catalyst #7: I can't think of a genuine catalyst
USD/CAD is coming off a streak of 10-straight days of declines and I'm having a hard time finding any reason for optimism.
Maybe all the bad news is priced in?
You have net specs in the CFTC report at -48K after weeks of climbing, so there is no easy spec money left to push it. There isn't any caution about the BOC, data or government moves.
So maybe we're asking the wrong question. Maybe it should be, what's the catalyst to push it lower from here? The first thing that comes to mind is oil, but if that's the case, why not trade oil instead?