Wednesday, 3 July 2013

Canadian Dollar Sinks to 2-Year Low - What Next?

Ralph Shell, Excel Analyst

Excel Markets Safe Trader Demo Account Contest, July 2013With little fanfare, the Canadian Dollar has quietly slipped to the lowest level since October 2011.  At that time, the USD briefly traded above 1.06.  This weakness has occurred despite the fact that central bankers have been favoring the Canadian Dollar as part of their allocated reserve currencies.  According to IMF data, these bankers added almost $95B of C$'s during the past six months.

During the period when the central bankers were accumulating Canadian Dollars, there was a gradual weakening versus the USD.  Central bankers, unlike leveraged forex traders, have a much longer time frame, and they are dealing with the relationship with many other currencies. There are 114 member countries providing data for this report.  Anticipating what they might do is not possible; but, we wonder: if the C$ had value at a small discount to the USD, will it not be more attractive at a 5% discount?

The C$ has suffered in a comparison to the USD.  The US recovery has been steady, and may be growing faster than Canada's.  Consequently, the USD gained popularity.  As we noted in the COT reports, the number of USD speculative futures longs set a record in late May.

Buying of the USD may have initially been the reason for C$ weakness but there have been a number of reasons for the C$'s weakness versus the USD.  Weakness in commodity prices is one reason the Canadian economy is perceived as weakening. Granted, Canada is much more than a commodities country but weakness in gold, silver, iron ore, copper, and the discount for the heavy bitumen oil all weigh on the C$.

Especially bothersome to the Canadians is the politics President Obama is playing with the proposed Keystone pipeline.  This proposed pipeline would move about 900,000 barrels of oil per day from the oil sands in Canada, and the surplus in shale oil from North Dakota.  Despite the fact that America has 175,000 miles of on and off shore oil pipeline there is continued opposition to construction of the Keystone XL, which would benefit both countries.  

Canada has the third largest oil reserves in the world.  Currently Canada produces about 3.2 million barrels of oil per day  which is anticipated to grow to 3.9  mbpd in 2018, and 6.7 mbpd by 2030.  Naturally the Canadians are anxious to increase the transportation of the Alberta oil to market but do not expect approval for the Keystone in the near future.

Longer term, Canada would benefit with the construction of both oil and gas pipelines to the west coast, as well as the construction of a liquid natural gas export plant there.  This would be in a position to sell energy to the Asian markets, but this is not likely in the near future.

Another concern in Canada has been concern about the high real estate prices, and the possibility the bubble would break.  Though prices and the volume of activity had been heading lower, prices remained high.  In the Toronto area, the average price of a single family home in May was C$696,797, while a condo was a mere C$350,598.

It appears now that some buyers, waiting for the crash, have been scared by the up tick in loan costs.  There are reports, prices and demand for real estate have picked up.  Fear of a crash in the housing market has abated. 

Click to Enlarge USDCAD Daily Forex Chart

Is there much more to the down side in the loonie?  Oil prices are firming close to 100/barrel on the WTI, no doubt caused by the unsettled conditions in Egypt and the war in Syria.  Chances are this will get worse before it gets better. Oil is Canada's biggest export.

On Friday, we get employment numbers in both the US and Canada.  Should the number come in poor in the US or much better in Canada, this would cause the USDCAD (FXC) to gain on the US.  The COT report shows us the specs are modestly short the C$.  We may try the short side in the 1.06 area.  As always, mind your money.
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