Tuesday, 8 April 2014

Canadian Dollar Looking For Direction

Ralph Shell, Excel Analyst

Today (Tuesday April 8th) the Canadian Dollar shrugged off some disappointing fundamental information and held its own versus the USD.  After the cold winter, it had been assumed housing starts would stage a strong monthly gain but such was not the case.  The starts were forecast at 156.8K down from the anticipated 192, and last month's 190.6. 

Excel Markets May 2014 Forex Demo Trading ContestRemember, this is a monthly number of initial housing construction, which is then multiplied by twelve, to arrive at an annual rate.  The value of the building permits was an 11.6% reduction in value versus a forecasted 2.6% drop.

These numbers can vary greatly on a monthly basis, so we must wait to see the trend.  Since the Canadian real estate market did not tumble like the US market, and then boomed when rates came down and the global recovery occurred, a slowdown in their properties markets might be well overdue.

After the report, the C$ did not weaken versus the USD but instead gained, trading toward the 1.09 handle.  Before reading too much into this, the USD was under selling pressure, and weaker against all currencies.  It should also be noted the COT Report reveals the loonie remains a favorite short position among the speculators, so there is a possibility of some short covering.

For the current year, the C$ has been a laggard as it has weakened from 1.06 compared to the USD to almost 1.13.  During this period, the spec short in the C$ futures soared to over 80K contracts.  Though it has been reduced, their short remains at almost 50K in the latest report.

There appear to be a number of reasons given for the bearish outlook for the C$.  The so called commodity currencies got hit because the Chinese economy, in large part responsible the commodity boom, was slowing.  There was also the view the US economy was going to recover faster than the Canadian, again viewed to be bearish the loonie.  Finally, it is felt Steven Poloz, the replacement for Governor Carney at the Bank of Canada, prefers a weaker currency to assist exports.

It remains to be seen if the US economy will out pace the recovery in Canada.  The nasty winter took its toll on both economies.  Today, the IMF forecast the US economy would have a 2.7% rate  of growth for 2014, compared to only 2.3% for the Canadians.  The Bank of Canada estimate is a more optimistic, a 2.5% Canadian growth rate. 

Achieving the 2.7% US growth rate is not guaranteed.  It was revealed in a report today the hiring plans by small US businesses has slipped to the lowest in eleven months.  Typically, small business is the hiring leader in a business recovery.  Does this mean small business is apprehensive about the recovery, or afraid of their share of the Obamacare cost for a new hire?  In either case, there would be a negative impact on the US recovery.

The argument the Canadians are at risk because of a weakened Chinese demand for commodities is also questionable.  The US is the destination for 70% of Canadian exports.  Further, their biggest export is crude oil.  The price for West Canada Select is above $89/ barrel this afternoon, which is only an $11 discount for WTI.

The Canadians are upset with Washington because of the continued delay in approval of the Keystone XL pipeline which is proposed to transport 900,000 barrels of oil per day from Canada and North Dakota to the refineries at the US Gulf. 

Since the US Government is dithering and obstructing the Keystone XL pipeline the Canadians are preparing to move this oil to a refinery at a port in Saint John, New Brunswick.  The Financial Post reported:

"...there is a 'Plan B' to cut the United States out of the picture, and it is championed by one of Canada’s wealthiest business dynasties.

Since 2012, the billionaire Irving family has been advocating a proposal called Energy East. The 2,858-mile (4,600-km) pipeline would link trillions of dollars worth of oil in land-locked fields in the western province of Alberta to an Atlantic port in the Irvings’ eastern home province of New Brunswick, north of Maine, creating a gateway to new foreign markets for Canadian oil. The $12 billion line, which would pump 1.1 million barrels per day, would include about 1,865 miles of existing natural gas pipeline converted to carry oil. The rest would be new construction, most of it along the banks of the Saint Lawrence River and into New Brunswick."

While this project might take until 2018 to complete, approval of such a plan, and the hiring of up to 20,000 workers for this project, would be a boost for the Canadian economy and their currency (in Canada the average monthly pay for a worker in oil, gas, energy and mining is C$ 10,522, the kind of good paying jobs Washington claims it wants.) 

The USDCAD (FXC, UUD, UDN) is now in the middle of the trading range for the first three months of 2014.  The next move for the pair is a puzzle, though it is acting like it might move back to the 1.08 handle. 

Against a long in the CAD, perhaps a more interesting short leg might be the euro.  The C$ to the USD is dissed because the projected growth rate of 2.3/2.5% falls short of the projected US rate of 2.8%.  However, the Canadian growth rate compares quite favorably to the 0.5% growth in the EU.  Yes, the loose money policies in North America has weakened the currency, but the tight money in the EU has restricted credit and stifled growth.  Further, the elevated currency and the reduced cost of the landed imports is leading to EU deflation.

So far the ECB and the EU Elites are pretending the recovery is just around the corner and everything is going to be alright.  The spirit of Pollyanna prevails. 

There is also the matter of energy policies.  For years the Canadians have ignored the Green demands and produced enough oil and natural gas to support their own needs, and export the surplus.  Compare this to the EU where they are dependent on the sun, wind, and some potentially unfriendly neighbors for their supply of natural gas and some of their crude oil and products. 

Specs have been playing the short side of the Canadian, and, to a small degree, the long side of the euro.  My preference is to sell the EURUSD in the 1.5050/1.52 area.  Trade small enough so you can stick with the position.  A target of 1.42 is possible with the right arrangement of your trading stars. 

Still, you need to carefully manage your money.
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