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The Currency Futures Report

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Will Canada Raise Rates?

Mon, Oct 19 2009, 07:30 GMT
by Alaron Team

Alaron

Commitment of traders data released Friday October 16th showed a decrease in positions betting against the US Dollar last week. Significant changes include an increase in short positions betting on the Sterling to decrease in value, and an reduction in net long euro and Yen positions.

JAPANESE YEN (Contracts of 12,500,000 yen)

10/13/09 week 10/06/09 week

Long 49,817 62,127

Short 16,478 17,484

Net 33,339 44,643

EURO (Contracts of 125,000 euros)

10/13/09 week 10/06/09 week

Long 79,762 86,229

Short 36,395 35,184

Net 43,367 51,045

POUND STERLING (Contracts of 62,500 pounds sterling)

10/13/09 week 10/06/09 week

Long 9,898 12,636

Short 75,244 74,742

Net -65,346 -62,106

SWISS FRANC (Contracts of 125,000 Swiss francs)

10/13/09 week 10/06/09 week

Long 27,537 28,261

Short 5,258 4,791

Net 22,279 23,470

CANADIAN DOLLAR (Contracts of 100,000 Canadian dollars)

10/13/09 week 10/06/09 week

Long 50,739 41,391

Short 6,543 5,616

Net 44,196 35,775

AUSTRALIAN DOLLAR (Contracts of 100,000 Aussie dollars)

10/13/09 week 10/06/09 week

Long 59,930 58,029

Short 7,283 7,864

Net 52,647 50,165

The Bank of Canada is likely to leave interest rates unchanged at a record low level, (0.25%), when it meets Tuesday, according to 23 of 23 economists in a Bloomberg News survey last week. The primary factor in leaving borrowing costs unchanged is that consumer price index data released last week declined for the fourth straight month, indicating a lack of inflation.

The rising Canadian dollar could slow the pace of economic recovery by lowering demand for its exports, however this may be offset by a strong US equity market and rising crude oil prices. The Bank of Canada is scheduled to release it's quarterly monetary policy report Thursday outlining it's inflation forecasts.

The Canadian dollar has increased by over 25% since March 2009, (From 7735 to a new high of 9719 Friday), and will likely test parity with the US dollar over the near term. Commitment of traders data above shows a large increase in long positions betting on the "Looney" to rise.

The US dollar hit fresh 14 month lows last week in a trend which is likely to continue as the US economy continues to struggle with rising unemployment and massive debt, which will likely prevent the Federal Reserve from raising interest rates well into 2010. Former Federal Reserve Chairman Alan Greenspan commented last week that larger budget deficits will continue to put downward pressure on the US dollar and upward pressure on borrowing costs.

The British Pound Rallied late in the week on Bank of England's Paul Fisher's comments that policy makers would be more likely to suspend asset purchases or qualitative easing, reducing concern of of it's flooding the market with new currency, according to Bloomberg News. This supportive rhetoric is similar to that of US Treasury Secretary Geithner's post G-7 statement October 3rd that a "Strong US Dollar" is very important to the US in that it is unlikely to support the currency over the longer term. Commitment of traders data released Friday shows currency traders are betting heavily of the Sterling to decline. Last week's rally may prove to be a good opportunity to establish limited risk short position over the near term.

Keep an eye on this report for new recommendations next week.

Published on  Mon, Oct 19 2009, 12:42 GMT