Market Insights: Loonie on 'Freight Train' Momentum

Macroeconomic and Market Developments:

• North American stock markets were fairly flat this week. In Canada, the S&P/TSX Composite index was up 0.03%. In the US, the Dow Jones was down 0.48% and the S&P 500 Index was up 0.02%.
• The Canadian dollar was positive again this week, closing at 81.35 cents this week vs 80.15 cents last Friday. This is the highest close since February 2018.
• Oil prices were positive this week, with US West Texas crude closing up this week at US$63.45 vs US$62.00 last Friday, and the Western Canadian Select price was also up this week at ~$53.00 vs ~$49.00 last week.
• Gold prices were slightly weaker this week, closing at ~US$1,767 vs ~US$1,776 last Friday.
• This week was an important week for US earnings releases with companies such as Tesla on Monday, Google’s parent company Alphabet along with Microsoft on Tuesday, Apple and Facebook on Wednesday, and Amazon on Thursday. For the entire week, Tesla was down 2.74%, Alphabet was up 2.33%, Microsoft was down 3.28%, Apple was down 2.13%, Facebook was up 7.95% and Amazon was up 3.86%.
• On Monday, Fortuna Silver Mines (FVI) and Roxgold (ROXG) entered into a definitive agreement whereby Fortuna will acquire Roxgold. Pursuant to the plan of arrangement, Roxgold shareholders will receive 0.283 common shares of Fortuna and C$0.001 for each Roxgold common share held, which implies a price of approximately C$2.73 per Roxgold common share, representing a 42.1% premium.
• Shopify (SHOP), Canada’s biggest company by stock market value, reported a big Q1 beat, blowing past estimates as the e-commerce boom continues. The company reported better than expected Q1 earnings of $2.01 excluding special items vs average estimates of $0.74, revenue of $988.6M vs estimates of $859.4M and provided outlook noting they continue to expect to grow revenue rapidly in 2021, but at a lower rate than in 2020.
• Statistics Canada reported that retail sales rose 4.8% to $55.1 billion in February, topping consensus and the agency's own +1.1% estimate. The agency also provided an early estimate for a 2.3% rise in March, continuing the trend of an improving economy.
• On Thursday, the US released its first estimate of first-quarter real GDP growth for 2021, showing an increase of 6.4% annualized, just below the Dow Jones estimate of 6.5%. It marked the second-fastest pace for growth since the second quarter of 2003 and was exceeded only by the reopening-fueled burst of Q3 in 2020.
• On Friday, Statistics Canada released Canada's real GDP numbers, showing our economy grew 0.4% in February, just shy of consensus. This marked the tenth straight monthly increase, adding total economic activity remained about 2% below February 2020 levels. As well, the agency provided an early estimate for March GDP +0.9%.
• Here is an INTERESTING ARTICLE we found on the much talked-about Bitcoin, looking at its value from a different perspective.
• For a deeper dive, the US investment company First Trust has put out a US COVID-19 Tracker. Click here: COVID TRACKER
• In addition, First Trust has created a COVID Recovery Tracker. Click here: RECOVERY TRACKER

Chart of the Week:

When looking at trends and what is moving this week, the Canadian dollar certainly stands out of late. In fact, the Loonie is now at its highest level in over three years since early 2018, hitting 81.5 USD cents this week. That isn’t far off its six-year high of 82.9 cents back in September 2017. This is a far cry from the 68.2 cent low it hit in last March 2020, rising almost 20% since that point.

It has been steadily strengthening against the U.S. dollar in the wake of the Bank of Canada's revised timeline for a potential interest rate increase. The central bank now sees a return to a normalized inflation environment in late 2022, putting a potential hike on the table around that time. There are some noteworthy economists projecting that the Loonie may push even higher. Our view is that firmer commodities, CAD supportive yield spreads, positive risk backdrop, and USD softness to most currencies likely point towards an extension of the Canadian currency rally in the near/medium term, but it would not surprise us to see the rally potentially stall out in the mid-80 cent range. Recent Purchasing Power Parity (PPP) data from the Organization for Economic Co-operation and Development (OECD) indicates a PPP of 80 cents; however, their forward estimates are projecting that to rise to 84 cents by the first quarter of 2022. PPP is the rate of currency conversion that tries to equalize the purchasing power of two different currencies, by eliminating the differences in price levels between countries. This seems like a logical target to us.

 

The Loonie is not the only currency to have appreciated against the USD in April, with the greenback losing popularity as optimism is more widespread. In addition, the Canadian dollar has not only been strong against the Greenback (up 3.7% YTD), but it has also risen against most other developed markets, up almost 9.7% to the Yen and 5.4% to the EURO this year. Our dollar has also strengthened 2.6% to the Pound. From a Canadian investment perspective, this can be a bit of a headwind in the short-term when foreign investments are owned in their local currencies as their value in Canadian dollars declines. However, on the other hand, in the past the US dollar has actually been a good hedge to downside volatility; therefore, owning securities in USD can also be a source of protection when needed in times of equity market corrections.

Source: StockCharts

 

Sources: CNBC.com, Globe and Mail, Financial Post, Government of Canada, Johns Hopkins University, oilprice.com, Tony Dwyer, Canaccord Genuity, BNN Bloomberg, StockCharts, Bank of Canada, Epsilon Theory, OECD