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The Canadian dollar crash and Federal election risk

The Canadian dollar fell 4.5 per cent in July alone and we are now trading at 2003 levels.

I have been fascinated by Canadian politics ever since my childhood, thanks to a political crush on the late Liberal politician Pierre Elliott Trudeau. Trudeau, a brilliant social critic and economist who studied under J.K. Galbraith at Harvard and Harold Laski at the London School of Economics, embodied my version of Jean Paul Satre's "homme engagé" in democratic politics. Trudeau was cerebral, patrician, internationalist. He defied the White House to start diplomatic relations with Mao's China and Fidel's Cuba. He jettisoned his Jesuit education to become an advocate of liberal values that have turned Canada into a magnet for the world's best and brightest. When General Idi Amin Dada expelled the Asians from Uganda, Trudeau worked with his friend the Aga Khan to fly thousands of Ismailis from Kampala to Dorval. Trudeau is one of world history's immortals now. As an adult, I was honoured to meet Trudeau's protégé and Liberal Prime Minister Jean Chretien, with whom I spent a week on VIP visits in the Gulf and hope to visit again in Ottawa. So it is with great sadness that I conclude that Pierre Trudeau's son Justin, the Liberal Party's current leader, has no chance to unseat Tory Prime Minister Stephen Harper in this October's election, even though the economy is in recession and the NDP governs Alberta.
As I scan the US jobs data and the smoke signals from the voting members of the Federal Open Market Committee, it is certain that the Federal Reserve will raise the overnight borrowing rate in September. This event will increase volatility in the global financial markets and trigger a Wall Street/global equities bloodbath, since the logic of the dual mandate argues for much higher US rates in 2016. This would be bad enough if it did not coincide with a macro blow-up in China and an oil price crash, but it does. Black swans and liquidity shocks will send shock waves across the hyperkinetic, leveraged digital netherworld of the global markets.
I am so grateful for all the friends in Canada, London and the Gulf who called me to congratulate me on the spectacular success of our short Canadian dollar idea, originally outlined at 1.06. As the loonie now trades at 1.31, I am thrilled that our ideas in KT helped so many Gulf "snowbirds" protect their wealth by bailing out before the 28 per cent fall in the Canadian dollar.
The Canadian dollar fell 4.5 per cent in July alone and we are now trading at 2003 levels, when Jean Chretien defied the Bush White House and refused to send Canadian boys to die in Iraq. Since 25 per cent of Canadian exports are oil and gas and West Texas crude has fallen to $43, the fall of the Canadian dollar has been savage. The central bank in Ottawa is now bunkering down for a protracted bear market in oil/commodities and a Canadian recession in 2015-16.
Ontario and Quebec's debt/condo bubbles and financial distress/capex cuts in the Western Provinces will amplify the recession and force the Bank of Canada into another rate cut and policy bias. Governor Poloz knows that this time wolf is here and the wolf is from Beijing. Every econometric model I have ever seen suggests the loonie's correlation to the US dollar spikes once crude oil enters a bear market and crude can well trade below its post-Lehman lows to $30 in West Texas. Southeast Asian currencies are trading at 1998 Asian flu/Suharto era levels. Why not crude oil?
The IMF will slash its global growth forecast again this autumn, possibly below three per cent. This means global recession and a rising interest rate spread between Uncle Sam-Ottawa debt as relative economic growth rates between the US and Canada widen. This is precisely the reason Harper called a Federal election this autumn, lest Thomas Mulcair create history as Canada's first NDP Prime Minister.
The net short loonie positions in the Chicago futures pits is now a shocking $3.5 billion. The loonie charts scream "sell, baby sell". Political risk will increase as the recession deepens and the elections come nearer. I had warned my friends in Montreal in 2014 to expect a loonie plunge to 1.36 (73 cents). I think we will achieve this target on eve of the Federal election this autumn.

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