Author Bio

Kathy Lien spoke on the Business News Network about USD/CAD and outlined the reasons for more gains. I agree with her sentiment. In this post, we’ll discuss her points and add more – all lead to more loonie strength in the long term.

Canadian economic figures

Lien mentioned the Canadian Ivey PMI and how it will help the loonie. Indeed, this figure came out better than expected: 57.8 versus 55.1 points. The focus now moves to the job figures. We’ve seen how Canadian job figures rocked the currency in the past, usually boosting it.

Even if the result barely exceeded the expectations, the currency jumped. The last release sent the pair below the 2009 low of 1.02. USD/CAD could settle nicely below 1 if the job figures on Friday make a surprise.

Interest rates

Kathy also mentioned a raise of the Canadian interest rate before the American move. The Canadians are very clear with their policy and the due date is June or July. This will probably be before Bernanke’s move.

I’ll just add that an American rate hike will come as the American economy improves. Such an improvement will push the Canadian economy higher as well, since Canada depends on the American economy, and that economic action in the US increases the demand for oil – good for the Canadian dollar as well.

Oil prices and the loonie

Regarding oil, Lien mentioned that a rise of oil prices towards $92 per barrel will probably send USD/CAD towards 0.97. She put numbers into the the oil-loonie correlation.

There’s a small hurdle before this line, at 0.98. This might be a stop for the pair before it approaches 0.97, maybe when oil approaches $90 per barrel.

Readiness for these prices

Last time that one Canadian dollar was stronger than one American dollar, Canadian officials were terrified and expressed this publicly. Lien reminded us of this and compared the attitude now – Canadian bank officials are speaking about a rate hike. Also Canadian politicians, such as PM Stephen Harper, are accepting this reality and are expressing confidence.

In addition to central bankers, also hedge funds are ready for the new prices. Lien discussed the improving status of the loonie – it is a less “risky” currency – different from the problematic Euro and the British Pound that is suffering from uncertainty.

The loonie’s status is becoming more of “safe haven” currency – getting attention from institutional investors. I’ll add that a very serious institution is the Russian central bank that decided to diversify its reserves with Canadian dollars.

All in all, this move to parity has a strong basis, and the current data points to more loonie strength.

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Author Bio

There are a lot of fairly extreme positioning situations out there among the major currency pairs at this point – positionings which could impact on market performance in the weeks to come. With that in mind, I thought it worth comparing how the Currensee is currently positioned compared with the data from the most recent futures Commitment of Traders report. Granted, the later is about a week old at this point, but we tend not to see big changes happen super rapidly, so it should be an interesting comparison.

It’s worth noting that only in the case of the JPY and the CHF is the Currensee community positioned the same way as the futures market. In the EUR, GBP, and CAD it is positioned in the opposite direction. This is something really interesting because it indicates pretty clearly that retail forex traders and the small futures specs (speculative traders) cannot be necessarily considered the same group as many would probably tend to do given their normal trading size.

It is also interesting because the large spec have a strong tendency to be on the right side of the trade. For example, in the EUR futures they got short in December and have only been getting generally more short ever since as EUR/USD has fallen.

This is not just a EUR thing. The large specs have been building their shorts in GBP over the same timeframe and we all know that cable has been pointed lower since December. They were their most long the JPY in the September to December period when USD/JPY was tumbling to 85, they were increasingly more long the CHF over the May to December period when USD/CHF was falling from 1.12 to parity, and they have been long the CAD since about this time last year, a span which has seen USD/CAD plummet from near 1.25 to near parity where we are today.

In other words, it looks like the Currensee community is currently mostly on the wrong side of things where the bigger picture trends are concerned – the ones to which the COT data relates. This could work out to the community’s advantage if there’s a sudden turn in the positioning of the large futures specs, but otherwise indicates that the retail trading collective is acting mostly in a counter-trend fashion.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.