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Canadian Dollar Showing Belated Strength

The early week constructive reports from Canada were dismissed by the market as stale news.  On Monday it was reported that the m/m GDP was +0.6%, better than the +0.5% anticipated and +0.2% in the previous period.  The following day, the Bank of Canada increased the overnight bank rate to 0.5%, undaunted by the economic convulsions coming from Europe.

The markets early indifference to the constructive Canadian news was in part attributed to the Tuesday's lower equity markets and a soft crude market.  Today equities have turned around, but the recent volatility may be awakening some bears from hibernation.  More than a half day rally is needed for confirmation.  Gasoline prices, on the first weekend of summer are an enigma.  Normally strong summer demand  would have gasoline at a much larger premium over heating oil.  This leaves people wondering if the economic recovery is as hearty as advertised.

While oil demand may be tepid because of economic conditions, there does appear to be some threats of supply interruptions.  If the hurricane season materializes as forecast, there appears little premium built in to the market as insurance against supply interruptions.  Further, the elevations of Arab/Israeli hostilities raises the possibility of a market premium for Middle East oil.  These are both situations that can work to the loonies advantage.

Later this week we get Canadian and US unemployment numbers.  In the US the rate is expected to go down to 9.8%, while the Canadian rate is to drop from 8.1% to 8.0%.  The US non-farm pay roll change is optimistically projected at 465k up from 290k in the previous period.  Perhaps we will get some clues about the recovery from these reports, but the devil will be in the details of the NFP so it is best not to react too quickly. 

Today the C$ has shown more strength than in the last several weeks.  Perhaps some of the old longs are gone from the market, and a 4 or 5% discount to the USD does not look like a bad option for those lugging the euro in their currency reserves.  The C$ strength combined with the political and policy uncertainties in Japan have also changed the appearance of that chart.  That pair has moved up over 250 pips today, bettering a 50% retracement from the last sell off.  The MACD has also turned higher.  Lets try to use a pull back into the 87.50 level to establish a long for a return to the 90 handle.

Disclosure: no equity positions