Saturday, 12 July 2014

Poor Canadian Employment Numbers Jolt the Loonie

Finally, the Canadian Dollar futures specs, after holding short positions in the loonie for over a year, migrated to the long side, only to be betrayed by some poor employment numbers.  The trade was anticipating 20K new hires for the month, but the loss of 9.4K jobs shocked the market. 

For the C$, which had recently appreciated from 1.09 versus the USD to 1.0620, the market was unprepared.  Quickly, the USDCAD raced from 1.0630 past the 1.07 handle.  The market acted like some of the new C$ bulls lost conviction and bailed from their positions.

Click to Enlarge 4-Hour USDCAD Currency Chart
The culprit in the jobs report was the Ontario labor market which lost 34K jobs last month.  For decades, Ontario has been the domicile for much of Canada's auto manufacturing, but many of these plants are aging and Ontario labor costs are high.  According to Stats Canada, the average adult wage in Ontario is C$24.80.  For union members the average wage is C$29.75.

Years ago when the C$ was at a big discount to the USD the big three US auto manufacturers built many plants in Ontario.  The recent boom in car sales since the recession, is resulting in construction of many new North American production plants.  According to a report in, Canada is losing their share of production.  Since the recovery there has been $42.3B of new plant investment in the US, Canada and Mexico, but only $2.3B in Canada.  Recently a spokesman for General Motors said:
"There’s no mistake that Canada continues to be the highest-cost producer for General Motors anywhere … in the world, and our labour costs are among the highest," he told reporters at the North American International Auto Show in Detroit.
Bank of Canada Governor has recognized the headwinds confronting Ontario manufacturing and had embarked on a campaign to weaken the C$.  Initially this worked, taking the C$ to better than 1.12 to buy a USD.  At that discount Canadian equities looked attractive, appealing to buyers.  Likewise the C$ was also attractive to central bankers.  The COFER Report revealed bankers added $21.3B loonies to their stash of currency reserves in the last year.

Click to Enlarge USDCAD Daily Currency Chart

Strength in the oil market also served to bull the loonie, but this run seems to have lost momentum.  Iraq is still producing, Libya shipments may be resuming, so the crude market has retreated, trading down under 101 for WTI Friday afternoon last.. 

Some of the optimism in the Canadian oil patch seems may too be waning.  The Financial Post reports:
Barely two years since the national outcry over China’s aggressive push into Canada’s oil patch, some of the major acquisitions are looking messy to hopeless.
Instead of reaping the rewards of their first big step out into a free market oil industry, Chinese investors seem more focused on cutting costs and bailing out. Scores of executives have been fired for failing to deliver.
There is another reason for pessimism in the Canadian oil patch.  It may not be profitable.  Break even on the newly acquired properties may range from 80/100 per barrel.   This heavy oil trades at a discount, often as much as $20/barrel because of grade and location to WTI.  Today August WTI is under 101 but the price gets cheaper in the future.  August 2015 traded at $94.50, and the Aug 2016 is quoted at $91.

The lack of pipeline shipping capacity is another problem.  Despite over 30K miles of North American pipeline capacity, Canada seems confronted with objections preventing them from building new oil or gas pipelines in any direction.  Canada needs to overcome these objections or they risk missing the booming demand for oil and LNG.

On this coming Wednesday the 16th of July the Bank of Canada will announce the results of their deliberations.  No change is expected in the 1% central banks rate.  It would not be surprising, however, that there will be reference for a cheaper loonie to aid Ontario manufacturing. 

It looks like the bull move in the loonie is over and we may be headed back to the 1.09 handle.  That said, it is hard to mount a horse that has just bolted from the gate. 

Manage your money carefully.
Ralph Shell, Excel Analyst
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