USDCAD reaches 12 year high; but here comes the reversal
- Weakness in the Canadian Economy driving its currency lower
- Inverse relationship between commodity prices and USDCAD exchange rate
- Why there could be a reversal in trend
How did the Canadian currency reach a twelve year low?
The US Dollar reached a recent high against CAD at 1.41081 on January 6th a level not seen since August 2003. The general bull trend the green back has been in picked up momentum since talk begun by the Fed of a return to higher interest rates.
A weaker economy will cause a currency to devaluate compared to the currency of a country with an expanding economy. It will also be enough for an economy expanding faster to see its currency appreciate against the currency of an economy that is expanding but at a slower pace.
The chart below shows annual GDP Growth for Canada and the US on a quarterly basis. It’s clearly visible how the US economy has been outperforming the Canadian economy. The US economy since 2014 has seen a GDP Growth rate above 2% while the Canadian GDP Growth rate has faltered to 1.2%
Another Macroeconomic factor that will drive FX rates is unemployment, again as it is considered a gauge for economic health. Unemployment in Canada is currently at 7.10% and is on the rise coming from 6.6% in January 2015. The unemployment rate in the US is currently at 5% and looks like it is on the way down coming from 5.7% in January 2015.
Inflation also has an effect on exchange rates as a currency that experiences high levels of inflation will see its FX rate depreciate against currencies with lower inflation. Canadian inflation is currently at 1.4% compared to inflation in the US at 0.50%. Add to this general macroeconomic narrative an increase in interest rates in the US and the Loonie had nowhere to go but down.
Commodity price and the Canadian Dollar
The Canadian Dollar is considered to be The commodity currency for its high correlation to commodity prices. This is due to the large percentage of exports that commodities like crude oil and other energy products account for.
Canada is a major exporter of various commodities, Crude Oil and other energy products being its main export. Crude Oil exported 2.6 million barrels per day in 2013, even at today prices that’s around $91 billion worth of exports. Gold is also an important export for Canada; in 2014 the country exported a total of $20.3 billion in precious metals and gems.
Canada on a global level ranks only 6th as a producer, but it is the world’s second largest exporter of wheat. The country exports $7.2 billion of this commodity per year, second only to the US.
The USDCAD exchange rate can add pressure to the price of these commodities and vice versa, as all of these commodities are quoted in US Dollars. If a commodity falls in price by 10% but the exchange rate increases by 10% then a Canadian producer will see his revenues unchanged. The decrease in commodity price is offset by the increase in USDCAD. Basically as the exchange rate rises a Canadian producer will receive more Canadian Dollars when they sell the US Dollars they cashed in from the sale of the commodity.
It’s hard to determine which moves which, or to establish which is the driver of the other. But there is a clear correlation between the two prices. The chart below shows the price movement of a basket of commodities versus the USDCAD exchange rate from September 2012.
Why is a reversal likely?
The USD has had an amazing bull run over the past 2 years with increases against all major currencies. It is currently at a 30 year overbought level according to some technical indicators. This alone could see a correction in the bull trend. But when comparing the Loonie to other major currencies we also see that it’s the currency that has lost the most.
In 2015 alone the Canadian Dollar lost 17.35% compared to 9% decline for the Euro. Over the past 2 years the Loonie has depreciated by 33%, while the next biggest loss was for the Euro which has dropped 20% over the same period. Other currencies like the Pound Sterling and the Japanese Yen have lost 10.50% and 11.75% respectively over the last 2 years.
There may also be a rebound in commodity prices over the next year. This will put downward pressure on the USDCAD exchange rate as we saw earlier. Crude Oil may see a spike due to geopolitical events in the Middle East. Gold may see its price increase if there is a sharp correction in the broad stock market, something which is beginning to seem more likely recently. Other commodities may see an increase due to inflationary pressure. Many commodities, or their derivatives, are constituents of inflation baskets. When considering Wheat by looking at the ETF WEAT:Arca we see price has fallen by 65% since it reached a high in August 2012. There certainly seems to be a lot oversold pressure on most commodities.
The fundamentals of these currencies have not changed, so the medium term trend is most likely to remain intact. But high overbought levels of the US Dollar and a rebound in commodity prices could see a major correction in the USDCAD exchange rate.
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All that remains from your correct analysis is:
- How much more pain of Chinese devaluing can the Fed take before it has to follow suit, and how fast can the need to 'competitively $devalue' accelerate before actions are taken?
At this rate, I'd wager months, not years.
*And never underestimate the power of insane U.S. foreign policy to influence the dynamic in a Huge and rapid way.
X2
Most of us are concerned about paying all our bills on time but when it comes to government they have absolutely no intention of paying back what they borrow so then it just becomes a giant confidence game of musical chairs.......you just don't want to be holding the debt when the music stops.
We will know there is a reversal when the cigarettes and Booze start crossing the border the other way..
Come on Canada, legalize Moon shine production and hand out some tobacco seeds. or that wacky weed stuff
all the other CAD crosses are majorly bearish, and yes..im short the CAD.
the data they are relasing tomorrow will be bad due to all the oil job cuts.
its going lower
Just a heads up that the technicals on the CAD show a bounce is coming, probably a big one. Who knows for sure, but the charts sure do support the arguments presented in this article. I wouldn't hold a position based on 'any' data... ever. 90% of the time data gets released and then the stock or commodity does the opposite of what we would expect anyway, thanks to intervention by whichever bank needs it to go wherever they want it to go. Manipulation man... it's so powerful that data means nothing. Charts on the other hand... they reveal a hell of a lot of information that's a lot more pertinent and valuable.
"90% of the time data gets released and then the stock or commodity does the opposite of what we would expect anyway, thanks to intervention by whichever bank needs it to go wherever they want it to go. Manipulation man... it's so powerful ...."
Did you just open your etrade account, yesterday?
Do some research... Start with...Buy the rumor sell the news...
That isn't manipulation, Copernicus... That's (and let me put it in a language that you will understand..) That's baaaa baaaaah bah baaah baaaaaaa!
It appears you didn't read what I said... or have 'ever' said.
Do some research? Haha
No I didn't open an etrade account yesterday, but I 'did' open a trading account 40 years ago. And have done very well. So I suggest you close the account you opened last month junior, and stop pretending you're smart or something. So just close your account and that will give you more time to go fuck yourself.
thanks....i agree..what ive noticed is that the 'data' is often priced into the instruement well before the release
the thing is..why should oil go up?
ive made some NICE gains shorting the cad on this oil play. but i will keep an eye out and get out if it looks fishy
My pleasure... I'm glad you took my comment in the good spirit that I had intended. About oil going up... I know there is a glut. We all know that all the storage facilities in the world are plumb full and that there are a lot of ships at sea just sitting there, looking for a place to offload. To be honest, I can also see another leg down in oil.
Just last night I read an argument why oil could hit the high teens and I don't disagree with that possibility. I just don't know for sure. I guess if I did, I'd be a rich man. And now today... this article from ZH where the guy being interviewed points out that we are just entering maintenance season when the refineries all shut down for repairs, etc. He says oil has bottomed. I just don't know... but war could also sure cause a fast and nasty blast-off for oil.
http://www.zerohedge.com/news/2016-01-06/thats-bottom-oil-market
yeah i wouldnt be surprised if it does spike up thanks to algo/HFT bidding. im gonna hold it short until tomorrow and get out and see how they look.
long term though, fundamentally speaking there isnt much demand for oil it seems. the US economy is running on fumes
the baltic dry is toast...i havent looked recently but i think the fertilizer swap market is toast too
thanks again
.....and how does this author use the metrics of GDP and Inflation as part of his anlysis when these two indicators are so manipulated they make the chinese numbers blush?? I'd like to see guys like this tarred and feather and left to stand on street corners waving chucky chicken signs for the rest of their lives once their bullshit prognostications are proven false.
I couldn't agree with you more. For example, this turd says "Unemployment in Canada is currently at 7.10% and is on the rise coming from 6.6% in January 2015. The unemployment rate in the US is currently at 5% and looks like it is on the way down coming from 5.7% in January 2015".
Is he nuts? Anybody who believes that unemployment in the US is currently at 5% has no business reporting on anything. He's parroting the official numbers produced by the government... numbers that are so out of whack, such lies, such propaganda that what he says can't be believed in the slightest. I would be embarrassed to write a statement like that.
Having said that, I do happen to agree with a lot of the other stuff he said, even though he's obviously unreliable. And that's only because I study charts and the charts suggest that his conclusions are probably correct about the commodity scene. Or very close to it.
under Harper Conservative and pre that Chretien Liberals and the neo liberal economic mantra they all follow to this day, a nation is supposed to put its efforts into what it does best, eggs all in one basket, which Canada has done with commodities,mainly oil, and let her manufacturing whither somewhat. With the global down turn the Canadian economy is now suffering with "Dutch Elm Disesase" and ergo the loonies impressive slumping fortune. I remember coming across an old set of encyclopedia year books from the 1920s through the 1930s. Canada was in the top ten of the world in the late 1920s but disappeared from the top 30 list the year books showed in the Great Depression of the 1930s. Apparently Canadian politicos haven't learned a damn thing especially since relegating their publicly owned central Bank of Canada to becoming a satrap of the international bankers cabal when its proper use would be the envy of most nations on the face of the globe. Poor poor stupid Canadians!!!!
COMER.com
In 1993 - 87% of CANADA's FEDERAL DEBT consisted of compound interest alone.
JUST LET THAT SINK IN!
"The unemployment rate in the US is currently at 5% and looks like it is on the way down coming from 5.7% in January 2015."
Now pull the other one.
The dollar will tank sooner or later. The question is, when will everybody notice that the emperor is naked as a jaybird......
Maybe is take time for everybody, but Reggie is already play with naked boy king.
The author first proclaims: “here comes the reversal.”
He then gives the following reasons for this inevitable reversal:
“…This alone could…”
“…There may also be…”
“…Crude Oil may see…”
“…Gold may see…”
“…Other commodities may see…”
“…could see…”
Then the author contradicts his initial thesis:
“so the medium term trend is most likely to remain intact.”
Conclusion: The USD/CAD trend will reverse, but is likely to remain intact.
What a load of speculative drivel