"You better move! You better dance!" - Ke$ha
And here I thought the Donald was going to take down Mexico.
Trump goes after Canada on the lumber trade. CAD moved on the news. Fast forward a couple of days, Trump comes out Wednesday night and says we are staying in NAFTA, CAD moves back on the news.
In the midst of these flashy headlines, I wanted to take this opportunity and actually dissect the noise and actually pinpoint what I think is truly important for USDCAD.
Let's start with the noise.
These were the main Canadian exports in 2014 - (sorry for the lagged data) Assume they haven't changed much.
As you can see, lumber is not a big driver here. From a correlation perspective, you get a lot of noise for both lumber and gold. Looks like nothing substantial there. I understand the Donald's posturing has ramifications beyond the Canadian lumber industry and that could have been the cause for the move. But I digress, there are more important factors for CAD - all shall be revealed as you keep scrolling down.
My eyes hurt from looking at this chart.
Alright, moving on to car exports, we start to see something more interesting.
Finally, looking at oil price, we really get something juicy.
But even here, we have seen the correlation between CAD and oil slipping since the height of the oil crash. In fact, weekly correlations (what I have plotted above) have been hovering around 0.2 to 0.3 in the last 12 weeks or so.
Now comes the signal.
This brings me to something that's even more interesting. The Canada housing bubble. I think this will be the main driver for USDCAD moving forward the rest of the year.
But in this situation, the housing bubble has gotten me thinking that things can actually continue to worsen.
If it does worsen, what will Poloz do? I think negative rates and QE are not out of the question in Canada. In the meanwhile, we could see steady rate hikes in the US (yes, we can argue about this, but let's do that on another day).
Thanks guys, good luck.