11. Market Focus – Canadian dollar
by Mike Jubinville of Pro Farmer Canada
I've been a dollar bull for a long time, but the two-cent decline to $0.86 cents U.S. this past week has everyone second-guessing this market.
A recent sharp decline in metal and energy markets, as well as dovish comments from the Bank of Canada pertaining to further interest rate hikes and a stronger U.S. dollar, caused our Loonie to plunge by two cents after nearing 15 year highs at the start of the month.
There are now ideas that the downward correction in the currency will continue for some time. The emerging argument is that the appreciation of the Canadian dollar since October of last year reflected very sustained, pent up demand for the Canadian unit, not just against the U.S. dollar, but on the crosses with other currencies as well. That pent up demand resulted in the Canadian dollar making some big moves against most of the main global currencies.
Part of the demand that had been built up was linked to firm commodity prices along with elevated mining activity in Canada. Some of the demand was also attributable to the Bank of Canada and its rate-tightening schedule.
All of these factors combined to generate the pent up demand for the Canadian currency that took it to the $0.88 U.S. cent level. However, some of that demand for the Canadian dollar was lost when the Bank of Canada's accompanying statement, after announcing its latest quarter percentage point rate hike on March 7, moderated their view on further rate increases.
The less hawkish view on future interest rate hikes caused investors to lighten up their Canadian dollar positions and in turn take some profits.
There is also the belief that the Canadian dollar is in the midst of correcting itself, technically, with the $0.85.1 U.S. cent level a possible target over the next month.
As for the downward correction in the Canadian currency continuing, few are willing to venture beyond that point for now.
As long as we continue to see a continuation of the favourable economic data in Canada, the fundamental backdrop that is pointing up will not change. Once the correction down near the $0.85 U.S. cent level has occurred, I suspect that investors will once again realize the Canadian dollar is still a good deal and that there is room to strengthen it further.
However, while the industrial commodities have taken a backseat to interest rate considerations, one can not necessarily rule out their affect on the currency either. If we see a fairly sharp move in commodity prices, either up or down, the currency market will sit up and take note and incorporate that action in the Canadian dollar as well.
The possibility of the Canadian dollar moving to the $0.90 U.S. cent level cannot be totally removed from the outlook. The actions of the Bank of Canada this past week have lessoned the probability. If you asked me the week before, I would have agreed that the Canadian dollar was on its way to the $0.90 U.S. cent level. This is something I have suggested for some time. However, with the Bank of Canada's change in interest rate policy this week, there is less likelihood of that occurring.
However, once the price correction is over and the market shakes out its weak position holders, the Canadian dollar could eventually move back into the $0.87 to $0.88 U.S cent level.
Mike Jubinville of Pro Farmer Canada offers information on commodity markets and marketing strategies. Call 204-654-4290 or visit http://www.pfcanada.com to find out more about his services.
by Mike Jubinville of Pro Farmer Canada
I've been a dollar bull for a long time, but the two-cent decline to $0.86 cents U.S. this past week has everyone second-guessing this market.
A recent sharp decline in metal and energy markets, as well as dovish comments from the Bank of Canada pertaining to further interest rate hikes and a stronger U.S. dollar, caused our Loonie to plunge by two cents after nearing 15 year highs at the start of the month.
There are now ideas that the downward correction in the currency will continue for some time. The emerging argument is that the appreciation of the Canadian dollar since October of last year reflected very sustained, pent up demand for the Canadian unit, not just against the U.S. dollar, but on the crosses with other currencies as well. That pent up demand resulted in the Canadian dollar making some big moves against most of the main global currencies.
Part of the demand that had been built up was linked to firm commodity prices along with elevated mining activity in Canada. Some of the demand was also attributable to the Bank of Canada and its rate-tightening schedule.
All of these factors combined to generate the pent up demand for the Canadian currency that took it to the $0.88 U.S. cent level. However, some of that demand for the Canadian dollar was lost when the Bank of Canada's accompanying statement, after announcing its latest quarter percentage point rate hike on March 7, moderated their view on further rate increases.
The less hawkish view on future interest rate hikes caused investors to lighten up their Canadian dollar positions and in turn take some profits.
There is also the belief that the Canadian dollar is in the midst of correcting itself, technically, with the $0.85.1 U.S. cent level a possible target over the next month.
As for the downward correction in the Canadian currency continuing, few are willing to venture beyond that point for now.
As long as we continue to see a continuation of the favourable economic data in Canada, the fundamental backdrop that is pointing up will not change. Once the correction down near the $0.85 U.S. cent level has occurred, I suspect that investors will once again realize the Canadian dollar is still a good deal and that there is room to strengthen it further.
However, while the industrial commodities have taken a backseat to interest rate considerations, one can not necessarily rule out their affect on the currency either. If we see a fairly sharp move in commodity prices, either up or down, the currency market will sit up and take note and incorporate that action in the Canadian dollar as well.
The possibility of the Canadian dollar moving to the $0.90 U.S. cent level cannot be totally removed from the outlook. The actions of the Bank of Canada this past week have lessoned the probability. If you asked me the week before, I would have agreed that the Canadian dollar was on its way to the $0.90 U.S. cent level. This is something I have suggested for some time. However, with the Bank of Canada's change in interest rate policy this week, there is less likelihood of that occurring.
However, once the price correction is over and the market shakes out its weak position holders, the Canadian dollar could eventually move back into the $0.87 to $0.88 U.S cent level.
Mike Jubinville of Pro Farmer Canada offers information on commodity markets and marketing strategies. Call 204-654-4290 or visit http://www.pfcanada.com to find out more about his services.
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