(14 votes, average: 3.5 out of 5)
Loading ...In what seems to be his first day back from the Labour Day festivities, Mark Carney again returns to work hard at keeping the Canadian Loonie below parity with the US Peso.
Something that’s getting harder and harder to do these days.
From this morning’s ReportonBusiness.com article:
But because the loonie’s reversal happened so quickly after passing 93.5 cents (U.S.), and the earlier rise was based mostly on speculators seeking a higher return than that offered by the U.S. dollar, a plausible explanation was that investors began to worry that the Canadian currency’s flight risked a reaction from the central bank.
Well, I suppose “plausible” is one way to look at it considering the article’s author timidly states:
Explaining moves in the global foreign exchange market is always difficult, since the reasons can vary widely, from businesses seeking to settle international transactions to speculators trying to exploit differences in the interest rates between two countries.
But whatever. It’s odd to me that the Globe and Mail won’t call it as it is: the US dollar is falling, the Fear trade is returning as the price of commodities are rising and the hyperbolic rhetoric is rising on the right side of the political spectrum that the current US Administration’s plans are going to cause the US dollar to fail.
Where have I heard that before – oh yes, last year when there was a different man at the helm in the White House.
So – with regards to the “imminent collapse of the US Peso”, I yawn and say “whatever” because – the likelihood is pretty much about, well zero.
“The market is not prepared to fight the Bank of Canada at the present time,” said David Watt, senior currency strategist at RBC Dominion Securities Inc. in Toronto. “The prima facie evidence suggests the jawboning is working.”
Well, I have to disagree based on this figure, which is a Yahoo! chart of FXC, an ETF that is based on the Canadian Loonie’s global value:
FXC from Yahoo
Now, this is a very simple analysis compared to some of my other techniques but, this is pretty much a simple case: FXC is in a Bullish mode now that the 100 Day Moving Average has crossed over the 200 Day Moving Average.
And that means, much as the Bank of Japan struggled against the Yen for so long last year, that there is little that can be done to fight the rise of the Loonie’s value. For those of us here, it’s a perfect opportunity to start making plans this fall to head south and buy some cheap Christmas gifts early, or perhaps go back to pounding on Indigo and Chapters to reduce the ridiculous price of books here*.
And if you review my posting from this spring and early summer, you’ll find that I was advocating the strength of FXC as well as the Brazilian Real vs the US dollar due to the expected return of the “Fear Trade”. However, you word it – that’s what this commodities rush is – fear in fiat currency.
The Globe and Mail has a different take:
Canada is among the world’s largest producers of both commodities, and the loonie tends to track changes in their prices. Tuesday proved to be an exception, even as other commodity currencies, such as the Brazilian real and the South African rand, held onto gains against the U.S. dollar.
But it’s pretty much the same opinion – just different wording.
Additionally UBS revised it’s opinion of Canada:
George Vasic, a strategist at UBS Securities Canada in Toronto, revised the Swiss bank’s outlook for the Canadian economy Tuesday, predicting gross domestic product will expand 2.9 per cent in 2010 from an earlier estimate of 2.4 per cent.
….
Further down the road, lower budget deficits in Canada mean the “cleanup from this mess will be far smaller” than in the United States and Europe, Mr. Vasic said, referring to the eventual necessity of paying for the trillions in debt run up fighting the financial crisis.
Canada’s relative economic strength, paired with rising commodity prices, explains much of the loonie’s increase.
It’s been stated by the IMF that Canada stands to be one of the first countries to have pulled itself out of the morass that has engulfed economies for the last year however, the final quarter of the year is still to be ridden through.
Commentary
I’m pleased with the FXC chart and recognise that there is little serious change that the Bank of Canada can do with regards to the rising Loonie other than perhaps knock it off it’s swerve now and then. I do disagree with Mr. Carney that the Loonie needs to continually price itself lower than the US Peso just to serve the fact that Canada’s largest trading partner has an ailing currency.
That strategy worked prior to the financial crisis of 2008. After much consideration, I am not convinced that it will be a good policy going forward because the entire global trading system is in the process of performing a complete reboot.
Once that reboot is done, only then, will be able to understand the ways in which trade will have changed.
For now, a rising Loonie is still an asset price that is rising – the chart looks good so, if one were inclined, this correction looks like a dip to be bought.
Theme Song
*US & Canadian booksellers insist imagining that the US dollar is worth $1.20 Canadian Loonies.
