What Is Ahead for the Canadian Dollar?

| About: CurrencyShares Canadian (FXC)

While the global news was focused on the demise of Bin Laden by the US Navy Seals, it largely ignored was an election north of the border. The election of Prime Minister Stephen Harper, a conservative, was a decisive victory, giving Harper a strong parliamentary majority.

As an unabashed pro business leader, Harper has some plans to make Canada even more business friendly. For example he wants to cut the corporate tax rate 1 1/2% to 15%. Contrast this to the US rate of 39%, which is among the highest in the world.

Another Harper reform may be the elimination of the Canadian Wheat Board. Formed during the depression years, in 1935 when wheat prices were extremely low, the Wheat Board is the sole buyer of the massive wheat and barley crops in Western Canada. The Board then became the sole seller of the premium Canadian wheat and barley in the global markets. Over the years central planning has proved very inefficient. Look at how the economies in China and Russia have changed. The new PM has decided it is time the well-intentioned but inefficient Wheat Board gives way to free markets.

Another goal of PM Harper is to expand the development of the Athabasca oil sands. It is estimated that there is the equivalent of 1.7 trillion barrels of oil in the bitumen deposits. This 1.7T barrels is equivalent to the worlds proven reserves of conventional petroleum.

The US is the biggest market for the Canadian heavy crude, with much of it flowing to the US in an existing pipeline that has a capacity of 591k barrels of oil per day. Proposed is a new pipeline, called Keystone XL, that would carry about 700k barrels of oil per day, carrying the heavy oil all the way to refineries in Texas. This pipeline needs to be approved by the EPA, the Dept. of Energy, and the US State Dept. Aware of the current US administration's opposition to the development of any new carbon energy supplies despite the soaring prices, Harper is proposing a pipeline be constructed to the West Coast of Canada, to supply the Asian markets.

The C$ has been a favorite of the specs for a long time. The last COT report showed them long about 86k, with the large specs a 10 to 1 long. Recent turbulence in the commodity sector has resulted in some liquidation of futures, perhaps 15k contracts. In an to energy exports, Canada produces and export wheat, forest products, gold silver and other metals.

Correlation of the crude price and the C$ has been very high during recent sessions. Recently, the CME increased the spec margin on crude, heating oil, and gasoline. So far the energy market has held its ground despite the increased margin requirements.

The chart show the USDCAD is an extended down trend going back to October 2010. One trend line comes in at .9790, and another at 99.42. The 20 period SMA remains under the 50 period, so despite the minor USD rally, the downtrend is intact. The MACD remains in a negative mode.

We hate to join the crowd, but the fundamentals of the C$ look sound and the trends are for a higher C$ versus the USD. Our choice is to sell the USD versus the C$ on any minor rally. Should the loonie get some strength and cause some liquidation, and violation of some stop areas, .9720, or .9790, we look to fade USD strength once the liquidation abates. As always, use money management stops.

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