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Forex Technical Report

Deflation Could Crush Canadian Dollar

Wed, Dec 3 2008, 15:44 GMT
by Forex Hound Analysis Team

ForexHound.com

Talk of deflation is once again threatening the Canadian Dollar. This is a major concern since the Canadian economy relies heavily on key commodities such as crude oil, gold, lumber and wheat. Although many experts have stopped short of saying that commodity prices have become victims of deflation, there are building concerns that this condition could occur particularly if China devalues its currency.

Much of the reason for declining commodity prices since July has been placed on over- speculation or the so-called “speculative bubble”. The bulls claim the rise in prices was justified because of an increase in emerging market demand and low supplies. At times the rally in commodities took on the classic “too much money chasing too few goods” look. Now that money has become tight and credit almost non-existent, commodity prices have been coming down as demand has dropped considerably.

This drop in commodity prices has hurt the Canadian economy causing the Canadian Dollar to lose a considerable amount of value since September 25. The USD CAD charts are indicating a new leg up may be forming. This latest interest in the long side of the USD CAD could be in anticipation of a deflationary scenario. At this time it can be blamed on low inflation and slower growth. The main concern is that over the short-run, lower inflation may turn into a deflationary scenario. This condition may be triggered by interest rates hitting zero in the U.S. or a possible devaluation of the Yuan by the Chinese. Watch Mr. Paulson in China on December 4. His primary reason for going is to tell the Chinese government to leave their currency alone. If negotiations go bad, the Canadian Dollar may be adversely affected.

Published on  Wed, Dec 3 2008, 15:45 GMT