April 17, 2018 / 6:57 PM / 8 days ago

Loonie mocks efficient-market theory as April win streak lengthens

TORONTO (Reuters) - The Canadian dollar is on course to strengthen in April for the eighth time in the last 10 years, a sequence strategists link to seasonal vitality in stocks and energy products, rewarding investors who trade on market patterns.

FILE PHOTO: A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015. REUTERS/Mark Blinch/File Photo

The potential to predict repetitive returns appears to contradict the well-known hypothesis of financial market efficiency. Still, the loonie has climbed 2.7 percent since the start of the month against its U.S. counterpart, making it the top-performing G10 currency.

“It is playing out really well again this year,” said Amo Sahota, director at Klarity FX in San Francisco. “We lighten up our (USD) positions in the month of March knowing that in April the Canadian dollar is going to get more expensive.”

Strategists say the tendency for energy prices to rise ahead of the U.S. summer driving season gives the loonie a spring boost.

“I think that dynamic is important,” said George Davis, chief technical strategist at RBC Capital Markets. “The broader commodity complex and crude oil have bullish seasonal windows through April.”

The price of oil, one of Canada’s major exports, has rallied this month to its highest in more than three years. Also bullish for the currency, the discount between Canadian crude and the U.S. benchmark has been cut in half since March to less than $15.

April has also brought cheer to Wall Street, with the S&P 500 climbing in nine of the last 10 Aprils and on track to do so again this year. Historically, the Canadian dollar has correlated very well with the S&P 500 and other indicators of risk appetite, said Mark McCormick, North American head of FX strategy at TD Securities. 

Investors’ willingness to take risk often signals confidence in the outlook for the global economy, which is important for a trade-dependent country like Canada.

To be sure, recent improvement in the prospects of a deal to revamp the North American Free Trade Agreement (NAFTA), which could be welcomed by the Bank of Canada when it updates its projections on Wednesday for the domestic economy, is not a recurring event.

The Canadian dollar has also outperformed in April against the Mexican peso, which strategists say is the best proxy for the chances of a NAFTA deal being reached.

A 1.9 percent April gain on average over the past 10 years is the best by far of any month for the loonie.

But the currency has often declined during the following month, and investors may want to keep in mind a stock market adage that warns of a seasonally weaker period on Wall Street.

“The ‘Sell in May (and go away)’ phenomenon kicks in” and the correlation between equities and the Canadian dollar starts to work in the opposite direction, McCormick said.

Reporting by Fergal Smith; Editing by Dan Grebler

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