CTS Spotlight Blog, Canadian Dollar, for April 27, 2012

04/27/12: The first signs of a crack in the US Dollar Index showed this past trading week. While a collapse is a little premature to predict, the break does suggest the much anticipated change in US Fed policy may still be quite some time to come. Indeed, confirming this notion, US Long dated Treasuries have reversed their recent breakdown and have pushed to new highs. Interestingly, the Canadian dollar has bottomed vs. the Greenback as Canadian bonds have not broken their recent top and on word from BOC Governor Carney warning the Canadian public to expect higher rates there soon. Additionally, Crude Oil looks to have found support just above $100/barrel which is interestingly often led/supported by the Canadian and Australian dollars (the commodity currencies). 

This week I thought I would take a good look at the Canadian dollar since I made reference to it so much in the weekly CTS. 

After putting in a well defined double top pattern through the spring and summer of 2011, the Loonie promptly gave back the entire bull run of the previous year in a matter of a couple months. Importantly, the Loonie did not break the previous significant monthly low (92.13) suggesting the longer term bull market was still in place. As it appeared that Europe's debt issues had for the time being been contained within Europe, the Loonie quickly took back a good portion of the sell off and has spent the better part of the past year oscillating between the lows and the 50% level. As energy prices have improved so too has the broader Canadian economy as well as the prospects for significant infrastructure spending going forward. The anticipation of such spending has created a whirl wind of activity within the western portion of the country. So much so that BOC chairman Carney recently warned Canadian's of higher short term interest rates to come. Additionally, Canadian long dated government bonds have not broken out as have their US counterparts suggesting any slowdown south of the boarder shouldn't be too constrictive on Canadian GDP.

As a direct result of this relatively rosy outlook for the Canadian economy, the Loonie has started to appreciate vs. the Greenback. On a short term basis, we have broken through recent peaks suggesting prices do want to move higher. While the short term bull flag I have outlined does suggest a move north of 104, on further inspection it does seem a little conservative of a target. I wouldn't be surprised if we shot a little farther than 104 then consolidate around the 104 area. Should be move through 104 cleanly (or on a subsequent breakout after a consolidation), a serious test of last year's peak (just above 106) seems likely.

A couple of side notes I would make here:

As a student of the market for more than 15 years, I have noticed that the commodity currencies in general lead basic commodity prices. Those currencies in particular are the Canadian and Australian dollars. Both are pointing higher at the moment which does support the notion of higher raw commodity prices in general going forward. This should be a helpful tool for all those that follow CRI's day trading blog on Crude Oil and does confirm our basic thesis that Crude prices are pointing higher too in the short term.

2. Interestingly, Asia had been the significant driver for world economic growth over the past decade and the Australian dollar was a direct beneficiary (almost doubling in value vs. the US dollar over the time period). As Europe flounders in its sea of debt and China appears headed for a harder landing than was expected, It appears in the short term North America (and particularly North America ex. USA) is currently the best place for economic growth going forward. Does that mean we could see the Canadian dollar rise materially vs. the Australasian dollar? Is this a spread trade in the making? Further research does seem warranted...

That's all for this issue of the CTS Spotlight,

Brian Beamish FCSI
the_rational_investor@yahoo.com

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