Loonie Mounting Another Attempt Toward Parity

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 |  Includes: FXC, FXE, FXF, FXY, UDN
by: Ralph Shell

Once again, the loonie is visiting the sub 1.03 level, testing the reception to determine the feasibility of an assault on parity. This morning's rally carried it to 1.0272, but it has since had a modest pullback.

Crude oil traded above $80/ barrel this morning, and some of the financial writers are attributing the modestly weaker USD as the cause. Something does not ring true with this explanation. Last year, when the dollar was declining, this was given for the reason why oil was going higher, but a rally in the dollar does not result in lower oil.

US economic releases this morning were mildly positive, and cited as another reason for firmer oil prices. The ADP Non-Farm Employment Change report, while still negative for the 25th month in a row, was the lowest since the downturn began. Shortly thereafter the ISM Non Manufacturing PMI was reported at 53, better than the 51 expected and the 50.5 in the previous period. The US Crude Inventory Report was negative, as an increase of 4.1 million barrels was much bigger than the expected increase of 1.2M.

The crude market refused to break with the bigger number and is currently moving close to the 81 handle. Currently the crude market market does not respond to bear news. We are approaching the period when the refineries slow operations, converting from distillates to gasoline prior to the peak summer driving season.

Seasonally the late spring is a period when the crude and gasoline markets trade higher. Perhaps a bull move in March is a false start for the bull run, but that market acts like it wants to trade higher. The all-time high in June 2008 was about $147, and was then followed by a brutal sell-off to the $33 per barrel area. A 50% retracement of the move would mean we print $90 a barrel, not an unreasonable objective.

With strong oil serving to boost the value of the loonie, what if the central Canadian bank rate is increased? As reported by Larry MacDonald on Seeking Alpha, there are recommendations for rate increases. He says:

The Monetary Policy Council (MPC) of the C.D. Howe Institute is content to let the central bank abide by its commitment to hold the overnight rate at 0.25% until July. Afterward, the median recommendation of the 9-member MPC is for the rate to rise to 0.75% by September and 2% by March of 2011.

A 2% rate by March 2011 is less than the 3.25% rates proposed by some inflation hawks.

If US employment numbers later this week are poor, as the White House Director of the National Economic Council Larry Summers has hinted, this will delay calls for higher US rates. Anticipation of higher rates from our northern neighbors, combined with higher oil prices certainly seems like a recipe for C$ parity with the USD.

On yesterday's rally in the C$, we did see the open interest in the futures market increase 4871 contracts. An increase in the open interest on a down day is generally bearish. Consider shorting this pair in the 1.0350 area, looking for a successful challenge of the 1.02 area.
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Disclosure: No positions