One of the conundrums facing us all as currency traders, is in trying to make sense of the underlying forces which cause one currency to strengthen and another to weaken as a result, and with the US dollar now gaining some traction, it is easy to assume that any major pair will reflect this fact, with a consequent weakening in the opposite currency. Oh, how I wish life were that simple! Whilst this is generally the case, it is never guaranteed, with the USD/JPY being a classic example, and one which often traps the unwary, as these two risk currencies trade in their own unique way.
In the last few weeks the dollar index has climbed from a low of 75.63 to trade at 81.09 on Friday evening, with most dollar denominated pairs following this trend for the US dollar. However, one that is clearly out of step is the USD/CAD or the Loonie, which has continued to fall, with the US dollar sold in favour of the Canadian dollar, so the question of course is why, and whether this trend is likely to continue in the longer term?
The US of course is Canada’s largest trading partner, with relatively small changes in economic outlook having a major impact on the Canadian economy and the Loonie as a result, and in the last months we have seen a number of positive economic figures for US markets. More significantly however have been the figures released in Canada over the same period, with the labor market in December showing a rise in employment to 22,000 up from 15,000 in November, with the release also showing full time employment was up 38,000 with a fall in part time employment down by 16,000, a positive signal for consumer confidence and spending. This positive sentiment is likely to filter through to the Q4 GDP figures out later this month. The Canadian dollar was also helped last week by November’s industrial product prices data, which saw prices rise by 0.5% along with a rise of 3.5% in the price of raw materials, both of which are directly related to and indicative of, inflation in the economy, and as such seen as leading indicators of consumer inflation.
A further contributory factor is of course the price of oil, and in particular the bullish outlook for crude oil prices in the longer term, with many market commentators ( myself included) now forecasting oil at over $100 per barrel in the near future. For much of 2010 oil prices remained waterlogged trading in a relatively narrow range, but towards the end of the year we finally saw a strong move higher with the commodity breaking above the psychological $90 per barrel level. Oil is one of Canada’s largest natural resources and hence the fortunes of the Canadian dollar are closely related to the price of oil, and in the last five weeks, the weekly crude oil inventories have shown a draw in supply, as improving growth and increasing demand are now setting the tone for oil. The relationship here is relatively simple – higher oil prices are generally reflected in strength for the Canadian dollar, and should this picture of good news stories, and higher oil prices continue, then we can expect to see the Bank of Canada signal a possible rise in interest rates, increasing the differential between the two countries, helping the Loonie to strengthen further.
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