Is the worst over for the listless loonie?

The Canadian dollar’s descent during the past three years has gone through three stages, so it’s worth wondering if the worst is over for the struggling loonie.

Stage one was the Bank of Canada beginning the recalibration of the currency to a level that aligned domestic manufacturing unit labour costs with U.S. levels. That meant nurturing a loonie somewhere in the US86-88¢ range.

Then it became an exercise in assessing the terms-of-trade hit from weaker oil prices and where the dollar would settle if WTI were to move into a US$40-$50 per barrel range. The answer was a loonie somewhere around US82¢. Been there, done that.

After the BoC rate cut last month, which was 100% about easing policy via the currency, it became a question of what level the loonie would have to depreciate to in order to provide enough impetus to manufacturing in Central Canada to offset the severe slump in oilrelated capex in Alberta and other energy-oriented regions (primarily Saskatchewan and Newfoundland and Labrador).

The answer was US78¢, and in very quick fashion, the loonie — which sank more than 4% in the days following the BoC move — got within a penny of that magical thresh- old. It has since bounced off that low, seeing as how it had become very oversold.

There is no sense pounding a fist on the table that the Canadian dollar is about to embark on a sustained turnaround at a time when the central bank has painted a bull’s-eye on its forehead. But there is a strong case to be made that the currency is putting in a bottoming formation.

This is the beauty of when bad news gets priced in very quickly as opposed to a slow bleed.

On a 90-day, 60-day and 30-day basis, the Canadian dollar has plunged 14%, 12%, and 10%, respectively. Outside of the 2008/09 collapse, the magnitude of the decline in what is historically a fairly stable relationship, as far as FX markets are concerned, is without precedent.

Remember: This is not a global depression. The last leg is about oil and, as we saw in 1986 when the Canadian dollar got sliced and diced, by the time the oil price bottomed in 1986, the loonie did the same.

That year, Alberta went into recession, the rest of the coun- try did not, but still felt the effects and slowed, the BOC cut rates as it is doing now, and the Canadian dollar by 1987 was heading up in a major way and nobody was talking about oil anymore.

A lot of bad news is already in the price of the loonie: a sharp Canadian economic slowdown and at least one more rate cut. Unlike three weeks ago, there is likely no more negative loonie surprise from the BoC. This is fertile ground for those of us with a contrarian streak.