Canada Caught in the U.S. Dollar's Web

Includes: EWC, FXC
by: The LFB

The Bank of Canada (BoC) released minutes of the recent rate meeting that showed the central bank is looking for a reversal in the 1.0400 value of the Usd/Cad currency pair. The concern of the Monetary Policy members is in the fact that the increase in value of the Canadian dollar is speculatively based by investors seeking higher yields in Canadian markets than in the U.S.

A stronger Canadian dollar that bases appreciation in commodity market growth is something that the bank can more easily tolerate as it leads to export strength as well. A move higher on C$ that is based on Usd weakness globally creates an imbalance in currency valuations.

Commodity/Speculative Growth

Without natural commodity demand to offset rising currency values the central bank is left to try to intervene somehow in the flow of momentum that looks to challenge parity. That challenge is made harder by the fact that economic growth is not at a level that the BoC would be willing to rapidly print new C$ notes and bills, nor would it be an easy job to chose to use existing reserves to achieve that goal of a weaker C$.

If left unchallenged the stronger currency will increase the cost of natural resource exports, as well as making Canadian manufactured goods less competitive, as well as reducing top-line profits from those companies in Canada that sell goods in Usd’s.

Technical View

TheLFB Charting Link

TheLFB Charting: Usd/Cad 4 Hour Chart

On the Usd/Cad pair a truncated wave V may still be the case as the market is trading well above the 1.0264 critical support zone. So long as this support holds, traders may be looking for a move up, near to the upper resistance line, especially if the 1.0581 top is taken out.

Any break of the 1.0264 support will suggest that bottom is not in place yet, and a move down to the 1.0000 area is still one of the possible scenarios. In this case, the A-B-C correction will be the correct count.

Commercial Impact

The real impact on commercial business may not yet be in the market, as the lag effect that comes from foreign exchange impacts on balance sheets has only just absorbed the credit-crisis moves lower in C$.

As the depth of the credit crisis was revealed there was a move to the greenback that sent C$ values initially lower, as the markets made an initial move to the safety of the Usd. The reversal to Usd weakness as global markets stepped in to buy all assets classes has yet to be fully felt on commercial balance sheets, and that is something that the BoC will be very aware of as parity comes into site on the dollar pair.

Inflation Impact

“While higher commodity prices have been supportive, movements in the Canadian dollar over the period appear to have been increasingly driven by a broader depreciation of the U.S. dollar against most major currencies,” the Bank of Canada’s October Monetary Policy Report stated.

“A stronger-than-assumed Canadian dollar, driven by global portfolio movements out of U.S.-dollar assets, could act as a significant further drag on growth and put additional downward pressure on inflation,” the report went on to say.

The distinction between natural growth and overall Usd weakness is now bought to the fore, and is something that traders will look to for signs of increased orders flows at current support and resistance price points.

Global Call

The Bank of Canada joins a list of central banks looking for a reduction in Usd values, with the call going straight into the U.S. Administration to stand firmly behind the publicly spouted Strong-Dollar policy.

Japan, Euro-zone, Australia, Canada, Russia, Brazil, China, have all recently called for Usd support from the U.S., which is something that may create a feeling of discomfort as the twin deficits of Trade and Current accounts look so much more appealing with a weak dollar.

Cad traders will be looking for 4 hour chart breaks of 1.0390 support, or 1.0590 resistance, as a sign that the wish-list from the Bank of Canada for a stronger Usd is following through, or not, as the case may be.

Disclosure: No Position in the above