Markets Mixed Signals--Sell The Loonie?

 |  Includes: FXC
by: Ralph Shell

Sometimes a market is judged not by the news, but rather by how the market reacts to the news. A market that gets bullish news and then fails to rally has just flashed a caution signal. Probably the most common reason a market fails to perform is the news has already been fully anticipated by the market participants. When that happens, the market has discounted the news, and usually markets only discount an event one time.

This week I find the behavior of the crude oil market perplexing. An outbreak of hostilities between Israel and her neighbors has occurred with missiles fired in both directions at numerous targets. What is surprising is the tepid response on the crude oil market. Brent is up 1.16/barrel to 110.77 but the more actively traded West Texas Intermediate has failed to hold the advance and now trades at $86.30, unchanged.

Normally, Mid-East war scares bring out the oil bulls, and the markets have had $5 or 10 a barrel increase. Granted, the Straights of Hormuz are so far not involved in this outburst, but the crude market action suggest something is wrong. Could it be the record North American supplies of crude are weighing on the market? Or perhaps the market is worried about the return of a recession in Europe? And yes, the economic news coming from the US is getting worse.

Today the initial US jobless claims for the week, expected to be 375K, ballooned to 439K. The Washington officials attributed the jump to the effects of the storm Sandy. The problem is, however, the storm hit New York and New Jersey the hardest but the biggest increase in claims was in Ohio and Pennsylvania.

Leading up to the election, the economic news seemed to portray a recovering economy, but the Obama opponents claimed the numbers were massaged to help elect the incumbent. We are now seeing the bad numbers, and are hearing stories about pending lay offs because of the Obamacare costs. Today it was announced that Denny's will charge a 5% "Obamacare surcharge" and cut employee hours.

We also had reports from the Federal Reserve Banks of New York and Philadelphia today. The New York number was negative -5.22 but not as bad as expected. The Philly Fed number was a minus 10.7 sharply down from a positive in the prior month.

The price action of the crude market seems bearish, and the US economic numbers are negative, but this does not necessarily mean you sell the USD. Haven buyers will still seek the perceived safety of the USD, and the US economy while slowing, has not turned negative-yet.

The Canadian Dollar might be vulnerable to further weakening because of the slowing US economy and weaker crude. Canada is producing more oil but much of the production is high cost oil in the Athabaska area of Alberta. To transport this oil to refiners, they need more pipeline capacity. Should the WTI sell off further, we may see the pace of development and the production slow.

The US is Canada's biggest trading partner, and the Ontario manufacturing sector would suffer with a contraction in the US economy. Further, manufacturing costs are high, and the movement of plants to Mexico and the Southern US will continue.

As we have observed in recent COT reports, the speculators are heavily committed to the long side of the Canadian futures markets. The total spec long was 82.8K in the most recent period.

Our preference is to try the long side of the USD versus the CAD. (USDCAD, FXC) From the current level of 1.0029, we think there could be a move to the 1.02/ 1.0250 area. As always, watch your money.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.