Observations on the Canadian Dollar

Includes: FXC, UDN, UUP
by: Ralph Shell

Once again the Canadian dollar assaulted the recent high versus the USD of 1.0204, and failed at the 1.0250 level. The pair then regrouped to 1.0410 these past two days.

The weakness in crude, which has traded back under the 80 handle, has been attributed to this morning's surprise increase in US inventories to 3.7 million barrels. There is a lot more to the Cad than crude oil, but it is always easier to talk about the obvious than to dig a little deeper.

The strong loonie has been touted for quite a while as a commodity currency because of oil, gold and minerals, but it is also a manufacturing country with strong trading ties with the US. The US stimulus plan enacted last year resulted in spending that stirred up some economic activity, and a cash for clunkers program that helped the auto industry. For years the US automobile industry has had manufacturing plants in Canada, and Ontario now has the dubious distinction of being a part owner in Chrysler. The results of the initial stimulus plan appear to be waning, and there is little evidence that it has had any positive long term results.

The COT report shows speculators in the Canadian currency are strongly committed to the long side. In the last report the large specs, probably funds, were long 43.5% of the total open interest while the small spec was likewise loaded up long 38.4% of the total market. Since the report came out, the open interest has increased so it looks like the longs added to their positions. With so many people already long and so much good news dialed into the market, what is it going to take to take the market through the 1.02/102.50 resistance area?

Remember the Canadian economy includes a lot of manufacturing, and as the largest trading partner of the US, their well being is related to the US' progress.

Despite the recent babble from Washington about the creation of new "green jobs," there is increasing disillusionment that we are on the right path to economic recovery, and this does affect our northern neighbors.

It is nice to have the Alberta oil sands as a back stop, but when the manufacturing sector is about as vibrant as a Detroit suburb, does the Cad deserve to have the current amount of speculator adulation? Let's try to sell the Cad in the 1.03 area risking 100 pips. If we don't get chased out and some of the specs get tired of the long side, a return to the 1.05 area is possible. (Click to enlarge)

Disclosure: no positions