A string of mediocre economic data has cast a cloud over Canada's currency, but even sometimes-bear David Rosenberg can see the bright spots.
"My, my, but it has become so fashionable now to be bearish on Canada. It is all rather surreal," the chief economist and strategist at Gluskin Sheff + Associates Inc wrote in a note this week, outlining his case for why the depressed Canadian dollar will rise again.
First off, it's not too hard to build a case for the negativity. This week, the Organisation for Economic Development and Cooperation predicted weaker growth for Canada, while recent retail sales data suggested consumers are still holding back on spending.
Last week, the central bank softened its stance on the immediate need for interest rate hikes and suggested it will probably hold rates steady for "a period of time," which resulted in some economists tweaking the timing of their forecasts. But paramount to the market is that the central bank continues to signal its "tightening bias."
All this has helped to keep any potential Canadian dollar gains in check.
Despite these factors, the collective bad mood is a curious thing for Rosenberg. He points to signs the slump in the Canadian housing market could be abating, while data suggests the labor market looks relatively stable.
Both the unemployment and inflation rates are lower in Canada than in the U.S., "which attests to the view that supply-side economic fundamentals in Canada are beginning to outshine what we are seeing stateside," he says.
As well, he added Canadian banks just finished a record quarter for earnings, while Canada is seeing capex-led economic growth and productivity is performing better on a comparative basis.
Still, Rosenberg says the loonie needs some key catalyst to give it some umph, citing notable events to provide a lift would be the U.S. approval of the Keystone XL pipeline or a pickup in China's economy. He sees 97 to 98 cents fair value for the Canadian dollar.
"One thing seems certain: Sentiment on the Canadian dollar has become so depressed that it would probably not take much in the way of any good news to spark a turnaround," he wrote.
Below is a condensed and edited version of an interview with Rosenberg.
Are people being too quick to be cautious about Canada's outlook?
"The reality is if this was just a made-in-Canada story, the Canadian dollar would not just be faltering against the U.S. dollar it would be weakening against a whole basket of other currencies. The bottom line is that that's just not happening. That's point number one. Point number two is that there are some things that have happened in Canada of late that are still worth noting. The Bank of Canada is sounding far less hawkish than it was earlier so the money market in terms of pricing in interest rate increases have taken that off the table. To some extent that has reduced the allure insofar as short-term interest rate spreads off the United States have tightened. Secondarily, commodities have not altogether done too well so far this year and there's still concern over the shape of China's economy."
Why are people on this bearish bandwagon?
"I would just boil it down to human nature. Whether it's the oil discount or it's the Canadian housing market or the fact that the economy here has been squishy soft, outside of the employment data of course. I think for the Canadian dollar bears those are the key considerations. I take a real birds-eye view of what's going on ... The bond market usually gets the story right out of any of the asset classes. You have a situation where, for example, in Canada where the two-year Canada yield is 70 basis points higher than it is in the United States. What that is telling you is the Canadian economy is operating at a much higher level than is the case in the United States. Not that we're growing more strongly, but we're operating at a much higher level... If you take a look at the long bond, the 30-year is trading at a 60 basis point discount to where long-bond yields are trading in the United States. This is important because it's so rare to have that pivot where Canada is trading at a premium at the front end and it's trading at a steep discount at the long end."
You've been referred to as a prominent bear or a permabear. This commentary doesn't seem pessimistic?
"We're talking about an exchange rate. You can't be bearish on both units. You can't be bearish on the Canadian dollar and the U.S. dollar at the same time. So unless you're completely neutral you've got to be bullish on one or two things. And I am more bullish on Canada than I am the United States ... In terms of the permabear, I'm not really into labels. People who know me well, personally and professionally, know that I'm not a permabear. Permabear is what the media likes, to attach labels to controversial and provocative figures who don't mind making bold calls they can back up through a thoughtful and analytical process. I can't guarantee that I'm always going to be right either. I've probably been right 51 per cent of the time and wrong 49 per cent of the time, and I guess that it's enough for survival on Bay Street, Wall Street, Montgomery Street or any street."