Once again the C$ has strengthened under the 1.02 handle, firming because of remarks made by Bank of Canada Governor, Mark Carney. The significance of his statement was summarized by Bloomberg, which said:
A June increase in interest rates by Canada could be the first among the Group of Seven industrialized nations this year. Carney said he will set policy with an eye toward meeting Canada’s 2 percent inflation target, regardless of the timing of interest-rate increases in the US.
The C$ had been selling off ever since the loonie failed to achieve parity with the US dollar on the projected date failed to materialize. The 100.59 level on March 19 was the best the bulls could muster and the market retreated , almost making it to 1.03.
Fundamentals do remain strong for the C$, but this is nothing new. By the time that the news is splattered on the front page of the Financial Post, the WSJ and other papers, the news has been discounted by the market. The first to raise rates after the long period of nearly free money is big news, but it is too much to expect a positive response from the market every day, when the rate increase is 70 days away.
The long C$ position may be handicapped by some other factors. The popularity of this trade has lured a lot of speculators to the long side of this market. The net long (long position minus the short spec positions) position of the large and small specs combined in the last COT report was 94,954 contracts! This morning, it was reported that the open interest in the futures only market was over 150,000. The Canadian market is second only to the euro in total open interest, symbolic of the popularity of the loonie. Additional bullish news is like preaching to the choir, and there may be a long line at the winner's window when the bull cashes in his tickets.
Recent USD strength has probably been working against the C$, as the euro and pound trade versus the USD has produced more US$ than C$ buying. Granted the C$ has had a massive gain against the euro, at 135.90, approaching levels not seen since November of 08, but we still thing there has been more USD buying. As the pressure on the euro recedes, will this favor the US or the C$? You would expect there to be some constructive verbiage coming out of the current euro central bankers conference.
The C$ has been on a bull run. There is an old market adage that the the bull needs to have constructive news every day, or some of longs become disenchanted with their positions and bail out. Currently the trade is around the 1.02 level. Is the next 150 pips up or down from here? Out guess is that time is going to test the patience of the bulls and the next 150 is down toward the 1.04 handle.
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Disclosure: No positions