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.
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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