7 Reasons Why the Loonie Will Trounce the Dollar

By Sean Hyman

There are many dynamics working against the dollar and for the Canadian dollar. I don’t claim that these are the ONLY reasons but I do believe that they are very important dynamics that are all collectively working at the same time to bring down the USD/CAD currency pair.

So let’s take a moment to discuss each of these briefly:

1. The IMF’s first bond sale – The International Monetary Fund is about to have its first bond sale to raise extra cash to the tune of about $150 billion (no small sum). The problem? Other countries like Brazil, China, Russia, etc. are investing some of their capital into them INSTEAD of the U.S. dollar and U.S. Treasuries. These countries are looking for more alternatives to dollar denominated Treasuries and this is ONE MORE venue for them to divert money into. A HUGE dollar negative in general.

2. Commodities in general are strong, but particularly oil! – Oil has rallied in the past few months from a low of $33 to the $70-$73 area recently. Since Canada exports huge sums of oil, as the price rises their profit margins widen.

Click to enlarge:

Note: Big institutional “buy & sell programs” kick in when these automated programs spot new trends. Many of these trends are defined by when the medium term moving average (the 50 day SMA) crosses the longer term average (the 200 day SMA). When the near term blue 50 SMA crosses above the red 200 SMA on the chart above, it triggers massive buy orders. When the 50 crosses below the 200 SMA, then it closes those positions and even goes short in many cases. As you can see, of late, another institutional buy signal has been instituted! This is bullish for the CAD and bearish for the USD, thus being bearish for the USD/CAD pair!

3. There are signs that point to the “worst being over” for the U.S. economy. Fed Chairman Bernanke has recently stated this by using his “Green Shoots” rhetoric. Other central banks have joined in, in stating that the global recession may be past the trough of its recession too. When the U.S. and global recessions make it past the trough and start to head out, global demand starts to pick back up which puts “new demand” upon the oil supplies that wasn’t there as the U.S. and global economy went into a tail spin.

4. Canadian stocks are outperforming U.S. stocks presently. So if you’re a savvy U.S. investor/institution, where are you going to put your money? In Canada where the stocks have fared better. However, this requires that you “sell dollars” and “buy Canadian dollars” in order to buy Canada’s stocks which are denominated in THEIR dollar. That’s bearish for USD/CAD and helps its “short sellers”.

5. Their banks are in better shape than ours. You see, Canadian banks didn’t go nearly as far out on the risk curve as our banks here in the U.S. did. Therefore, they didn’t need nearly as big of a “bailout” as our banks here in the U.S. The stronger your banks are, the stronger your financial system is. Therefore, Canada shines in this area when compared to that of the U.S.

6. Mutual Fund reports showed that in May, U.S. investors resumed purchases of foreign stocks for the first time since this whole thing “blew up”. That’s bad for the greenback and good for foreign currencies like the Canadian dollar as U.S. investors sell dollars as they switch into foreign stocks bought with their home currency.

7. And finally...the U.S. Dollar Index continues its downtrend! Therefore, for all of these reasons, you can see why the USD/CAD chart continues to downtrend (red line). In fact, today we’re having a massive sell off right at its downtrend line on Canadian dollar strength EVEN AS their banks are shut for a holiday. Wow!

Click to enlarge:

Therefore, it’s my opinion that those who are “short sellers” of this pair will prosper in the weeks to months ahead. You do this by initiating your order by clicking on the sell quote. Then when you feel the trend is finally coming to an end, you click on the buy quote to close out the short.

One thing I love about currencies is that they trend for a long time and rarely reverse courses very quickly. Therefore, this trend could continue for quite some time to come.

Disclosure: The article has a position in the currency trades mentioned in this article.

Original article

Comments

[kmanm:]

The problem with Canada is that it is too dependent on US economy for it's growth. Also, Canada is not easy place for businesses to grow. Taxes are high and I think this will always put Canada somewhat at disadvantage compare to it's biggest trade partner (US).

Jul 02 08:41 AM

[dual cit:]

Now here is an article that has no factual basis to leverage their argument. I just love these guys who never bother to review history or learn the lessons of the past. Nothing has changed folks. Canada is an insignificant country of 30 million who's existence is predicated on the health of its neighbor to the south. With its entitlement programs and lack of exports, short of unprofitable oil (especially if they bothered to meet any environmental standards digging and cooking the tar), they could run into deep deficits quickly as they now are. Debt as a ratio to GDP is about equal to the U.S. at this point but could run much deeper. And they will spend ! Example - Canada's cost to save GM ran 3x per capita than the U.S. - smart decision eh?

Jul 02 09:11 AM

[knight:]

I hope you are kidding. Canada's 30 million people are sitting on 2nd biggest oil reserves in the world!! Canada was the strongest country going into this recession out of any G7 countries (budget and trade surplus). Canada has an abundance of precious metals and oh ya the STRONGEST banks in the world today. You should check your facts. Why do you think the Canadian dollar is almost at par with the US dollar. The reason they would pay that much for GM is because Ontario and not Michigan made more cars in North America than anywhere else. Get with the resent this is not 20 years ago.


On Jul 02 09:11 AM dual cit wrote:

> Now here is an article that has no factual basis to leverage their
> argument. I just love these guys who never bother to review history
> or learn the lessons of the past. Nothing has changed folks. Canada
> is an insignificant country of 30 million who's existence is predicated
> on the health of its neighbor to the south. With its entitlement
> programs and lack of exports, short of unprofitable oil (especially
> if they bothered to meet any environmental standards digging and
> cooking the tar), they could run into deep deficits quickly as they
> now are. Debt as a ratio to GDP is about equal to the U.S. at this
> point but could run much deeper. And they will spend ! Example -
> Canada's cost to save GM ran 3x per capita than the U.S. - smart
> decision eh?

Jul 02 10:24 AM

[nun:]

Yes it's dependent on the US but Canada is one of few countries that can be a net exporter of both food and oil.

Jul 02 12:49 PM

[Esol Esek:]

your theory is fine as long as this recession doesnt double dip globally, sending commodities back into the basement...

plenty of analysts, both famous and not, think this recession is far from over, and considering how much is riding on it being over, it could still collapse into full out depression. We're still in early innings...if we're not, you're probably right, but if we're still in a deflationary environment, the loonie will be a bad place to be...

Jul 02 01:22 PM

[Anthony Pri...:]

The Canadian economy is not as dependent on US economy as many would like to believe,our resource base is attractive to south-east Asia and our oil sands ,ironically,will help US ddeal with its dependency on foreign oil.
Canada,is the continental solution....so therefore there is a case to

be made that the US is becoming dependent on CANADIAN economy.

Jul 02 06:12 PM

[derryl:]

A rising Cdn$ puts pressure on Cdn manufacturers who have relied on a lopsided exchange rate for their profitability. If Cdns sell exports in US dollars and convert those US$ to Cdn$ at $1.40 they make $1400 Cdn for every $1000 US they export. But at $1.10 they only make $1100 Cdn for selling the same exports. This is true for all exports, including commodities.

Central Cdn manufacturing has been shedding jobs for the past several years as the loonie appreciated against the greenback and profitability declined. I agree with the author of this article that the loonie will continue rising against the greenback, though I see a lot of ups and downs rather than a smooth rise so shorting the US$ in this pair might produce some unpleasant surprises.

I think the best way to play this trade is buying Cdn tarsands stock, like Suncor, Syncrude, etc., on the Toronto exchange. If the loonie rises 10% against the US$ your stock has increased in US$ value by 10%. Plus you get in on the commodities upside, if there is one, and I think longer term there is a large upside for oil.

Jul 02 11:07 PM

[KIT:]

1. The IMF’s first bond sale – The International Monetary Fund is about to have its first bond sale to raise extra cash to the tune of about $150 billion (no small sum). The problem? Other countries like Brazil, China, Russia, etc. are investing some of their capital into them INSTEAD of the U.S. dollar and U.S. Treasuries. These countries are looking for more alternatives to dollar denominated Treasuries and this is ONE MORE venue for them to divert money into. A HUGE dollar negative in general.

If Canada joins in and adds Canadian dollars to the fund there is no effect on the USD. Canada has to take is USD holdings and convert them to CAD first to effect the USD. There is nothing stopping any government from printing their currency and adding it to the fund damaging there own currency and increasing the value of the USD. These bonds are to be used to back up banks in any country so the currency that goes in may have to be converted into USD in the end to be useful.

Jul 03 12:54 AM

[Swiftcreek1:]

The USD will become weaker vs. the CAD for a much simpler reason. The Inflationary cycle likely to be triggered by our Government borrowing and spending money like a bunch of drunken sailors on a port call after 6 months at sea. That said, I still wouldn't put my eggs in the CAD basket. I still believe that inspite of the Canadian economy being far more resource and manufacturing based per capita than the US it is still too dependent upon the US market for it's long term growth.

China's continuing pressure on the G20 to revisit the "USD as the Global Reserve Currency" is a much more troubling issue for the USD. If China is successful in making it's case that our debt load is too massive for the USD to sustain it's perceived value as a store of wealth and safety then the Dollar is in trouble and there could be an "anywhere but here" run on the USD.

I could see a scenario where the Chinese would untie the value of the Yuan from the dollar in a bid to make the Yuan the new Reserve Currency. To me it becomes a not-so-farfetched idea as we watch the Chinese stock-piling commodities of all types in a bid to improve their infrastructure at home and prepare for the eventual global economic recovery which will have them poised to start cranking out Chinese widgets in massive numbers again.

Couple that with Chinese investment in USD denominated assets in Real Estate in the US, and the increased Chinese investment third world countries to exploit natural resources and labor costs that are cheap even by Chinese standards and you have a scenario in which it would almost be to their advantage to try to force the G20's hand.

Playing the USD/CAD game is fine if you want to stay in North America and play trends and have some paper asset growth.

Personally, I'm Bearish on anything paper which is why I'm shifting money outside of North America into raw farmland and opening small manufacturing, wholesale and retail businesses in South East Asia.....

True financial safety is in food, resources, and products that people need to live and have a decent quality of life, anything else is paper asset gravy. That isn't a bad thing, but I'm thinking that GM common stockholders are finding that the stock certificate doesn't taste very good and has very little nutrituional value.

Jul 04 02:29 PM