There are many dynamics working against the dollar and for the Canadian dollar. I don’t claim that these are the ONLY reasons but I do believe that they are very important dynamics that are all collectively working at the same time to bring down the USD/CAD currency pair.
So let’s take a moment to discuss each of these briefly:
- The IMF’s first bond sale – The International Monetary Fund is about to have its first bond sale to raise extra cash to the tune of about $150 billion (no small sum). The problem? Other countries like Brazil, China, Russia, etc. are investing some of their capital into them INSTEAD of the U.S. dollar and U.S. Treasuries. These countries are looking for more alternatives to dollar denominated Treasuries and this is ONE MORE venue for them to divert money into. A HUGE dollar negative in general.
- Commodities in general are strong, but particularly oil! – Oil has rallied in the past few months from a low of $33 to the $70-$73 area recently. Since Canada exports huge sums of oil, as the price rises their profit margins widen.
Note: Big institutional “buy & sell programs” kick in when these automated programs spot new trends. Many of these trends are defined by when the medium term moving average (the 50 day SMA) crosses the longer term average (the 200 day SMA). When the near term 50 SMA crosses above the 200 SMA, it triggers massive buy orders. When the 50 crosses below the 200 SMA, then it closes those positions and even goes short in many cases. Of late, another institutional buy signal has been instituted! This is bullish for the CAD and bearish for the USD, thus being bearish for the USD/CAD pair!
- There are signs that point to the “worst being over” for the U.S. economy. Fed Chairman Bernanke has recently stated this by his “Green Shoots” rhetoric. Other central banks have joined in, in stating that the global recession may be past the trough of its recession too. When the U.S. and global recessions make it past the trough and start to head out, global demand starts to pick back up which puts “new demand” upon the oil supplies that wasn’t there as the U.S. and global economy went into a tail spin.
- Canadian stocks are outperforming U.S. stocks presently. So if you’re a savvy U.S. investor/institution, where are you going to put your money? In Canada where the stocks have fared better. However, this requires that you “sell dollars” and “buy Canadian dollars” in order to buy Canada’s stocks which are denominated in THEIR dollar. That’s bearish for USD/CAD and helps its “short sellers”.
- Their banks are in better shape than ours. You see, they didn’t go nearly as far out on the risk curve as our banks here in the U.S. did. Therefore, they didn’t need nearly as big of a “bailout” as our banks here in the U.S. The stronger your banks are, the stronger your financial system is. Therefore, Canada shines in this area when compared to that of the U.S.
- Mutual Fund reports showed that in May, U.S. investors resumed purchases of foreign stocks for the first time since this whole thing “blew up”. That’s bad for the greenback and good for foreign currencies like the Canadian dollar as U.S. investors sell dollars as they switch into foreign stocks bought with their home currency.
- And finally…the U.S. Dollar Index continues its downtrend! Therefore, for all of these reasons, you can see why the USD/CAD continues to downtrend. In fact, today we’re having a massive sell off right at its downtrend line on Canadian dollar strength EVEN AS their banks are shut for a holiday. Wow!
Therefore, it’s my opinion that those who are “short sellers” of this pair will prosper in the weeks to months ahead. You do this by initiating your order by clicking on the sell quote. Then when you feel the trend is finally coming to an end, you click on the buy quote to close out the short.
One thing I love about currencies is that they trend for a long time and rarely reverse courses very quickly. Therefore, this trend could continue for quite some time to come.