Considering a Stronger Canadian Dollar

Mar.29.10 | About: CurrencyShares Canadian (FXC)

The Canadian dollar is well bid in the weak US dollar environment. Higher oil price and firmer commodity prices in general are thought to be lending support as well. The Bank of Canada's Jenkins speaks today near noon EST.

Gov. Carney's hawkish comments last week seemed to signal the liklihood of a rate hike in June or July. Core inflation, he said, was rising more than officials had expected. Last time the Canadian dollar was near parity there was some consternation, but not this time. Officials and market participants seem more relaxed. Carney indicated the BOC views the exchange rate "through the prism" of inflation.

Hence, rising inflation means a greater acceptance of Canadian dollar strength. While this is an important week for US economic data (ISM, auto sales and payrolls), this is a light week for Canada. The main highlight will be the January GDP report midweek. The consensus is for an increase on par with December's 0.6% pace. Canada is expected to be among the fastest growing G7 economies this year and next. According to consensus forecasts, it is a toss up which is stronger 2010-2011, the US economy or Canada's.

On the inflation front, Carney noted the sluggishness of Canadian productivity growth. This will add to the inflation risks. Indeed, Canada often experiences inflation earlier in its business cycle than do other advanced industrialized countries. This is underpinning expectations of a rate hike well before the Fed.

Initial support is being tested in the CAD1.0180 area, but key support is really closer to CAD1.0150. A break of that latter level could see a big figure decline today the mid-month low near CAD1.0060.

The Commitment of Traders at the IMM showed that the net speculative position has steadily grown since mid-February from long 8800 contracts to long 73k as of the most recent report. This is the highest since late '07. While market positioning may not prevent a test on the Canadian dollar's recent highs, it may warn of some obstacle taking it through parity straight away.

Disclosure: No positions