Recovery Confirmed: Canadian Dollar a Solid Investment Over Next Few Months

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 |  Includes: DBV, FXC, UDN, UUP
by: Forexyard

By Greg Holden

The release of a 3.3% growth in Canada’s GDP for Q4, 2010, appears to show moderate strength returning to Canada’s economy, above what was previously expected.

A surge in exports due to increased economic activity in the United States, as well as heightened global demand for industrial metals and crude oil, has helped support Canadian economic growth. High oil prices are also feeding a strong uptick in the Canadian dollar (CAD).

The USD/CAD pushed below its 23.6% Fibonacci level (weekly chart), its lowest price since Feb. 2008. This descent well below parity has helped boost Canada’s buying power in world markets, but will eventually gouge its exports. For the time being, Canada is reaping the benefits of healthy growth.

USD/CAD - Weekly Chart

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The Loonie’s pairing against other currencies, however, reveals not only healthy growth, but stability. Versus the Japanese yen and Swiss franc, two global safe-havens, the CAD has found solid support from its 23.6% Fib level and is trading in its most stable range between this line and the 38.2% resistance level. This has granted Canada a relative advantage against these two financial powerhouses and further enhanced its economic foundation.

CAD/JPY - Weekly Chart

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CAD/CHF - Weekly Chart

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A number of economists have expressed recent concern for this surge in economic growth, however. This is because Canadian exports will begin to confront challenges brought on by its doggedly-persistent currency growth and seemingly-weaker output in industrial production.

Though this sentiment weighs on speculation, three other forces strongly support the recent boom in Canadian optimism. The first is export growth, which was at its highest growth level in over six years. The second is consumer spending which has been increasing beyond forecasts over the past twelve months, with the exception of last month’s 0.1% lower-than-forecast figure. The third is inflation which remains at or above desired levels, according to the Bank of Canada.

Analysts appear unanimous in the judgment that Canada’s recovery is confirmed and running ahead of forecasts. However, many have conditioned this judgment with a concern that the Loonie’s surging growth rate may hinder exports over the next two quarters. And, as expressed above, the relatively lower output in Canada’s industrial sector has raised flags among many investors.

Nevertheless, the CAD appears to be a solid investment over the next several months.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.