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An anomaly called the Canadian dollar

Mon, May 5 2008, 21:35 GMT
by Mihai Nichisoiu

Mihai Nichisoiu

In a special research note forwarded to the brokerage house I work for, titled 'An anomaly called the British pound' and dated September 13th last year, I was anticipating a significant depreciation underway of the sterling versus the Danish krone and the Euro (a revisitation of those ideas was published here on September 19th). Just one day later, on September 14th, the British lender Northern Rock Plc publicly requested emergency funding from the Bank of England.
Since those days, the British pound had come down about 20% versus the Euro - a remarkable market move from which I happened to profit handsomely.

One brand new anomaly I perceive is now unfolding in the foreign exchange comes down to the recent dynamics of the Canadian dollar, particularly versus the US dollar.

Last Wednesday I noticed here: 'With the data now at hand, I perceive that the Canadian dollar has a very good chance to turn significantly weaker versus the US dollar. I see that process starting soon, and then unfolding impulsively over several months'.
I continue to hold the perception, based on several premises, that the Canadian dollar remains in a significantly vulnerable position versus the US currency.

First of those premises refers to the monetary policy. Over the latest months, Canada has clearly been lagging the US in that regard - and I just don't see that fact changing anytime soon. If it were for both corresponding central banks to radically go for the opposite of their recent monetary policy approach, I still expect Canada to remain a laggard by far.

Secondly, just like the British currency, the Canadian dollar failed to benefit in any particular fashion from the massive depreciation suffered lately by the US dollar in most of its major markets. It failed to benefit from the fresh record highs which have been seen along a wide spectrum of commodity markets. Most of all, it failed to benefit from fresh all-time highs that have been attained recently almost on a daily basis in the oil market; although historically there has been a strong, direct correlation between the oil price and the Canadian dollar, lately that correlation has no longer been working. The oil market still displays one of the last major bubbles that hasn't yet come to at least a temporary bust; when such an event finally materializes I think the path of least resistance in the USD/CAD proxy is going to be upward.

And then, there are the charts - which, beyond tight timeframes, I believe still appear to be constructive for those buying the US currency against the Canadian counterpart.

Published on  Mon, May 5 2008, 22:23 GMT