Index Options

Has the Tide Turned for the Canadian Economy?

Patrick Ceresna
April 1, 2016
4 minutes read
Has the Tide Turned for the Canadian Economy?

The last two months have dynamically changed the narrative toward the Canadian economy. Over those two months, the markets have substantially shifted, including:

  • 15% rise in the Canadian Dollar from its $0.68 lows to its current levels around $0.78.
  • 27% rise in oil prices from their lows below $30.00 to around $38.00 today.
  • 16% rise in the TSX60 from its 680.00 lows in January to its current levels at 790.00
  • 36% rise in the Canadian Energy stocks based on the iShares S&P/TSX Capped Energy ETF (XEG).
  • Canadian GDP numbers for January came in at 0.6%, double the 0.3% forecast.
  • Canadian Real Estate in Vancouver and Toronto continue to accelerate with strong demand at record levels.
  • The Federal stimulus package is expected to give the Canadian economy a boost and diversify the economy away from being commodity centric.

So everything is ok, right? Thumbs up, time to go long Canada, EH!

The picture may not be so rosy when this is all put into context. Let’s tackle the bullish points one at a time.

First off, the Canadian dollar rally has to be put into context of the prior decline. The decline in 2015 was one of the single most significant and steep declines in the Canadian dollar since the 2008 financial crisis. After such extremely oversold conditions, the current rally is just modestly retracing the prior weakness.

Similarly, when looking at oil, after a decline from $120 down to under $30, this rally can categorize as proportionally underwhelming. Even a 50% retracement of the 2015 decline should have seen oil rise to above $50.00 a barrel. If broader weakness persists, further pressure will continue on many of the mid-tier oil producers as many companies are burning heavy cash flows at current levels.

Much of the rise the Canadian stock markets was driven by a broad rebound in commodity stocks and financial banks. There are plenty of risks that this may be short lived. There remains a global economic slowdown that will keep the rise in commodities in check. At the same time, the global banking sector remains heavily challenged in Europe, China and increasing in the U.S. In that light, Canadian banks still disproportionately rely on energy financing and real estate for their revenues. While both energy and real estate are stable for now, where is the future growth engine going to emerge?

In regards to the economy, the January GDP numbers had a big boost from the weak dollar, which now has rebounded. Will the strengthening dollar weaken future numbers? Obviously many turn to the Federal stimulus package as a further driver of growth, but many experts are skeptical suggesting that the federal budget could still fall short of delivering a meaningful pick-up in growth.

From our perspective, there are plenty of reasons to still consider hedging some of the risks. Utilizing option overlay strategies such as protective puts, collars and index option hedging are all very attractive, particularly during this period where the implied volatility in the markets has declined making it more affordable to implement.

Patrick Ceresna
Patrick Ceresna

Derivatives Market Specialist

Big Picture Trading Inc.

Patrick Ceresna is the founder and Chief Derivative Market Strategist at Big Picture Trading and the co-host of both the MacroVoices and the Market Huddle podcasts. Patrick is a Chartered Market Technician, Derivative Market Specialist and Canadian Investment Manager by designation. In addition to his role at Big Picture Trading, Patrick is an instructor on derivatives for the TMX Montreal Exchange, educating investors and investment professionals across Canada about the many valuable uses of options in their investment portfolios.. Patrick specializes in analyzing the global macro market conditions and translating them into actionable investment and trading opportunities. With his specialization in technical analysis, he bridges important macro themes to produce actionable trade ideas. With his expertise in options trading, he seeks to create asymmetric opportunities that leverage returns, while managing/defining risk and or generating consistent enhanced income. Patrick has designed and actively teaches Big Picture Trading's Technical, Options, Trading and Macro Masters Programs while providing the content for the members in regards to daily live market analytic webinars, alert services and model portfolios.

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