Canadian Dollar vs. European Currencies

In recent weeks we have recommended long Canadian dollar positions against the US dollar and the Mexican peso. Over the past month, the Canadian dollar has been among the best performing currencies, gaining 8.6% against the dollar and more than 7.5% against the Mexican peso. We are concerned that from a fundamental perspective, much of the good news for Canada has been discounted, such as higher commodity prices and the recovery in the auto sector.

The persistent strength of the Canadian dollar risks some condemnation by Canadian officials who are worried that it may hamper the recovery. At the same time the technical indicators are stretched for the Canadian dollar, suggesting that the risk is for a deeper correction. That said, sentiment toward the US dollar is poor and we are wary of Mexico's fundamental backdrop, especially with the peso trading on the strong side of its range. Therefore, for those who share concerns about the Canadian dollar, consider selling the Canadian dollar against the euro or sterling.

Since July 9th the euro has slumped more than 7% against the Canadian dollar and appears to have begun carving out a bottom in the second half of last week. It is currently trading near CAD1.54 having briefly dipped below CAD1.52 on July 30. A move above CAD1.5450-60 area would target CAD1.5625 and possibly CAD1.5750. For a particularly tight stop, consider CAD1.5320, which if the euro broke would call into question whether CAD.15200 is really the bottom.

For its part, sterling peaked against the Canadian dollar a little before the euro and proceeded to depreciate by nearly 8.25% against the Loonie since June 30th. After hitting a low on July 24th, sterling has done more work carving out a bottom. The low was near CAD1.7735 and now it is flirting with CAD1.81. There is near term potential toward CAD1.85 and then CAD1.87. A tight stop could probably be set just below CAD1.80.

Comments

[400128:]

It is going to be a tough recovery in Canada, East vs. West - energy vs manufacturing - or what is left for manufacturing. Suncor PetroCanada merger and the fact that no one is drilling with AECO below $3 makes Calgary a nervous place but still the dollar will be strong with the occasional pull back and the boom in the West or at least Alberta will drive this nation out of the recession until the transfer payments to the have nots or at least work nots causes a rise of a Western Independenc movement (again).

Aug 05 11:22 AM

[Moon Kil Woong:]

If the dollar trades below the Canadian dollar it will be bad for Canada and just sad for America. I remember when Canadian dollars were a joke because they were so low to the US dollar. In a few years the US dollar may find itself in the reverse situation with just about every currency.

I haven't been so impressed with the rally since it is mostly being shouldered on dollar depreciation. I would be impressed if the dollar rallies and the stock market rallies in tandem. That would mean people were really betting on recovery, not just fleeing US Treasuries.

Aug 05 11:35 PM

[Paulo:]

In the past half century, the Canadian dollar has traded above the American dollar on a number of occasions (and under a floating currency exchange system will do so on and off again in the future).
The Canadian dollar has also traded at less than two-thirds of the value of the American dollar in that same time frame (and could do so again under similar circumstances).
The average investor (more than the trader) can use these fluctuations to good advantage -- converting Canadian dollars to Euros or Swiss francs when it hit $1.10 produced a nice return and selling investments in American dollars as their value declined but the Canadian dollar declined even more enabled you to at least break even.
U.S. investors who bought preferred shares of Canadian financial institutions at or near the most recent low of the Canadian dollar will have done quite well, no?

Aug 06 12:36 AM

[somecatchyp...:]

Investors that think the Canadian dollar will be a good safe haven against a falling US dollar should reconsider. The Canadian economy is highly reliant on exports to the US. I believe it’s something like 70% of all Canadian exports go to the US. Considering this, I’m very confident that the Canadian government will debase the loonie proportionally to any declines in the US dollar.

The Canadian government is making efforts to diversify it’s trade. As we speak, the Minister of Finance and Bank of Canada governor are in China on a trade mission. Unfortunately, expanding overseas trade and reducing the dependence on the US is a process that will take years.

Aug 06 06:52 AM

[HaavBline:]

Canada already HAD a very long and friendly relations with China until Stephen Harper became prime minister maybe 3 years ago.

Harper enjoyed the juvenile political act of sticking his fingers toward the Chinese. The relationship cooled, until US economy fell off the bottom and turned 'protectionist' toward Canada last year. Harper's goverment has been trying to repair the China relationship step by step since late 2008.

Australia was the biggest beneficary while Harper wrecked Canada's Chinese connections.

Aug 13 06:53 PM