If we can use the Canadian dollar futures markets as a barometer, speculators have become quite bullish on the loonie. In our quarterly review of the volume changes in currency trading, we noted the remaining open interest in the C$ was 207K contracts when the September futures contract expired. This compares to only 97K open when the June futures expired.
The big buyers of the loonie have been speculators. In the last COT report, the specs net long had gone up to 139.3K. Trade in the Canadian dollar is so popular that the open interest was, at 208K, is only a little shy of the euro OI at 218K.
The specs' rationale for buying the loonie is straightforward. Canada, financially, is a well managed country, and a producer of oil and other commodities. Globally, the big central bankers are going to increase liquidity, which has bulled commodities in the past.
Since the middle of September when markets were busy getting ready for helicopter Ben's next dosage of liquidity, both the C$ and the WTI oil have been drifting lower. The November WTI crude has sold off from 100/barrel at the beginning of the month to under 90/barrel this week. The USD versus the C$ was worth .9633 on the 14th and has since strengthened to about .9830. With the end of the quarter upon us, will there be long liquidation?
The continued financial turmoil in Europe is negative for those buying the risk assets. In addition, this was followed yesterday with negative U.S. economic reports. Core U.S. Durable Goods (M/M) was a negative 1.6, and the total U.S. Durable Goods was a negative 13.2%. Released at the same time was the (Q/Q) GDP Annualized at a positive 1.3%, down from the expected 1.7%. Today, the University of Michigan Sentiment Report was a bit lower, and the Chicago Purchasing Managers Index fell sharply to below 50.
The economies of Canada and the U.S. are "joined at the hip," and Canada is much more than a commodity producer. Ontario, the big manufacturing providence, reported labor negotiations were concluded this week between the Canadian Auto Workers and General Motors, Ford, and perhaps Chrysler.
When the C$ was a discount to the USD, many U.S. companies moved their plants north.
Now, with the currency advantage gone, so is the incentive to manufacture there. Chrysler claimed that Ontario auto manufacturing costs are the highest in the world. Since the Canadian plants produce their new best selling Jeep and Dodge mid-size cars, Fiat (Chrysler's owner) will settle. But when the four year contract ends, Fiat will likely follow others and move the production from high cost Ontario to the U.S. South or Mexico.
There is another perplexing issue with Canada. If the oil sands are such a valuable resource, why are many of the original developers trying to sell their interests? Chinese and Indian companies have been buyers from the original developers, and Conoco Phillips, Shell, and Marathon may have more acreage to sell.
Currently, China's CNOOC is trying to acquire Nexen. Since Nexen also has leases on acreage in the U.S. Gulf waters, this will be a political squabble.
A larger concern, though, is why some big players in the oil patch are reducing their exposure in the oil sands. Could it be that the recent advances in drilling technology represent a threat to the high cost Alberta sands oil? With the new technology, the results of the drilling are immediately transmitted, practically from the drill bit to a computer. Will this technology discover cheaper supplies of better quality oil?
The Canadian bond market has been a favorite destination for global bond buyers in recent years, and this has boosted the currency. Avery Shenfeld, the chief economist at CIBC World Markets, says:
"...that since 2007, international investors have purchased Canadian-dollar bonds worth $280-billion, compared with $65-billion over the previous five years.
That demand is partly explained by a healthy appetite for AAA-rated securities. But international investors also are buying Canada because they are being pushed out of other markets by interventionist central banks. Canada's dollar is among the most overvalued in the world," Mr. Shenfeld said, citing calculations by the International Monetary Fund.
The AAA rated Canadian bonds have been a comforting place to invest when economic turmoil is plaguing so many countries. This helps the loonie, as does fear the eurozone may no longer be a safe place for currency reserves. This is what caused the rush to the C$, but the market is now overloaded long. If the IMF calculations are correct and the loonie is overvalued, it would not take much to push the loonie down to parity with the USD (USDCAD), (FXE), (UUP), (UDN).
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