I am heavily bullish on U.S. interest rates for multiple reasons. But, that does not mean I am bullish on the USD, per se. In fact, given the past performance of certain commodities, currencies and interest rates, I am becoming more bullish on the CAD versus USD.
The economy of the United States and its neighbor to the north mirror each other very tightly. So do their respective 10-year yields on interest rates. In fact, if I put up the interest rate charts of both countries and asked the respective central bankers which chart was who's, I doubt I would get a firm answer but more like a guess. The chart for the two country's 10-year government bond
yields are below:
U.S. interest rates are heading higher. If the correlation remains in tact, so will Canadian interest rates.
There are a number of reasons why U.S. interest rates will be heading higher. To name a few: the economy and the Fed, dwindling foreign purchasers and the fact that eventually the ECB and BoJ will end policies that are pushing down interest rates in some of the biggest economies in the world. Take away those two 800-pound gorillas in the room, and all of a sudden the the interest rate picture looks chaotic.
Along with interest rates, the Canadian dollars mirrors oil. Below, I have inverted the chart on USDCAD to show CAD as well as the oil chart:
Look at the charts above. CAD and oil are practically the same chart minus the minutia of smaller intermediate price movements. American imports more oil from Canada than anywhere else in the world. And, given that, it makes sense that as the economy in the United States expands more and more, creating more and more jobs, the needs for oil will increase along with that.
You would think, however, that the economy of Canada is purely oil. Canada exports a great deal of commodity products, in general. This could be oil, lumber, coal, and other minerals. But, commodity prices largely mirror the overall economy in general. If the U.S. economy falters, commodity prices falter. That is the consequence of supply and demand. And, by coincidence, this follows through with the CAD currency.
I have been interested in long CAD crosses versus other currencies. Certainly the CADJPY cross has gotten my attention and I have done well with it over the past few weeks. Believe that U.S. interest rates are going to far outperform Japanese rates by a long shot. I also see CAD interest rates mirroring the U.S.
The mathematics of CAD versus JPY and USD versus JPY make for a continued move upward in this leg of the carry trade.
Disclosure: I am/we are long OIL.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.