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Since the beginning of August, currency futures speculators have been putting on a very large long position in the Canadian dollar. According to the latest COT report, the spec long was down from the high -- 139.3K contracts on the September 18 report -- but only to 122.7K. As we pointed out, the spec position in the Canadian dollar was bigger than any other currency futures position.

Much of the buying had been prompted by the anticipation of expansion of the money supply, a response to a slowing global economic climate. So far, only Fed Chairman Bernanke has come forward with a plan, but there are hopes the ECB and the incoming Chinese politicians will join the party. In such an environment, commodities have traded well in the past, and the countries producing them have benefited.

With Canada's AAA credit rating, investors have favored the country as a safe haven. There are some potential problems that do exist going forward, however, for a currency that may be overvalued.

In the oil patch for example, things may not be going as well as they might. The Athabaska sands of Alberta do have huge reserves, but this is high cost oil. Should the WTI crude drop below $80 per barrel, the Canadian revenue obviously would decrease, but so too would development of these resources. Further, this oil is a long way from refineries. There are pipelines south of the sands production area, but new production in the Canadian and U.S. Bakken area is expanding rapidly, taking most of the pipeline capacity.

The Western Canadian Providences depend on revenues of oil and natural gas to finance the governments. The Globe and Mail reported:

West feels chill of low prices for natural gas.

Canada's western energy powerhouses are feeling the chill from sluggish natural gas markets.

Sales activity at British Columbia's auction for exploration rights nearly ground to a halt in September, while Alberta and Saskatchewan are being pinched as energy companies scale back their budgets for targeting new natural gas prospects.

The sagging fortunes in natural gas are hitting government coffers already strained by budget deficits. Last month, the B.C. government's deficit forecast for the 2012-13 fiscal year widened to $1.14-billion from $968-million, largely due to dampened prospects in the natural gas sector. B.C. Premier Christy Clark's Liberal government will be hard-pressed to present a balanced budget for the 2013-14 fiscal year, as mandated by law.

B.C. is primarily a natural gas play, but the slowdown at monthly provincial auctions in all three westernmost provinces reflects the reality that obtaining new gas exploration rights has fallen out of favour.

This year is shaping up to be the worst showing for selling B.C. rights to drill for petroleum since 1998. In September's land sale, British Columbia sold just $1.5-million in rights, compared with $17.3-million in the same month last year.

Energy producers have spent $92-million to acquire B.C. drilling rights in the first nine months of this year. By contrast, in September, 2008, the province attracted $221-million at its monthly land sale during a boom year.

Even Alberta and Saskatchewan, where there is ample oil production, and government acreage for sale, are both confronted with lower land sales because of the low price of natural gas. Finances in the capital Ottawa may be in order, but some of the provinces are struggling.

So far, the Canadian economy has been resilient, able to bounce back from the recent global financial crisis. There may be some storm clouds on the horizon, however. The Financial Post reported: "Canadian households are continuing to pile on debt at a record pace, while corporate leaders are pulling back on their business plans because of weak global economic growth and uncertain demand."

This, combined with a Canadian real estate market that may be showing signs of vertigo, makes us cautious.

There is some optimism the Germans and the Spanish are going to walk away from the EU Summit this week with some sort of bailout agreement. In which case, the pundits say it will be time to buy the "risk on" investments. Should this give us some strength in the C$ -- back toward the 98 handle -- we wish to buy the USDCAD (NYSEARCA:FXC), (NYSEARCA:UUP), (NYSEARCA:UDN) for a move back to parity.

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Source: Are The Canadian Dollar Longs Starting To Sell?