Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
If You Don’t Understand Bonds, You Don’t Understand Investing - 25th Aug 19
Gold's Next Move - 25th Aug 19
Fresh Water Crisis Unfolding - 25th Aug 19
Newbie Guide to Currency Pairs in Forex Trading – Review - 25th Aug 19
When A 16-Year-Old Earns $3 Million, You Know It's Not A 'Silly Fad' - 24th Aug 19
The Central Bank Time Machine - 23rd Aug 19
Stock Market August Breakdown Prediction and Analysis - 23rd Aug 19
U.S. To “Drown The World” In Oil - 23rd Aug 19
Modern Monetary Theory Could Destroy America - 23rd Aug 19
Seven Key Words That Explain "Stupidly High" Bond Market Prices - 23rd Aug 19
Is the Fed Too Late Prevent A US Housing Bear Market? - 23rd Aug 19
Manchester Airport FREE Drop Off Area Service at JetParks 1 - Video - 23rd Aug 19
Gold Price Trend Validation - 22nd Aug 19
Economist Lays Out the Next Step to Wonderland for the Fed - 22nd Aug 19
GCSE Exam Results Day Shock! How to Get 9 A*'s Grade 9's in England and Maths - 22nd Aug 19
KEY WEEK FOR US MARKETS, GOLD, AND OIL - Audio Analysis - 22nd Aug 19
USD/JPY, USD/CHF, GBP/USD Currency Pairs to Watch Prior to FOMC Minutes and Jackson Hole - 22nd Aug 19
Fed Too Late To Prevent US Real Estate Market Crash? - 22nd Aug 19
Retail Sector Isn’t Dead. It’s Growing and Pays 6%+ Dividends - 22nd Aug 19
FREE Access EWI's Financial Market Forecasting Service - 22nd Aug 19
Benefits of Acrobits Softphone - 22nd Aug 19
How to Protect Your Site from Bots & Spam? - 21st Aug 19
Fed Too Late To Prevent A US Housing Market Crash? - 21st Aug 19
Gold and the Cracks in the U.S., Japan and Germany’s Economic Data - 21st Aug 19
The Gold Rush of 2019 - 21st Aug 19
How to Play Interest Rates in US Real Estate - 21st Aug 19
Stocks Likely to Breakout Instead of Gold - 21st Aug 19
Top 6 Tips to Attract Followers On SoundCloud - 21st Aug 19
WAYS TO SECURE YOUR FINANCIAL FUTURE - 21st Aug 19
Holiday Nightmares - Your Caravan is Missing! - 21st Aug 19
UK House Building and House Prices Trend Forecast - 20th Aug 19
The Next Stock Market Breakdown And The Setup - 20th Aug 19
5 Ways to Save by Using a Mortgage Broker - 20th Aug 19
Is This Time Different? Predictive Power of the Yield Curve and Gold - 19th Aug 19
New Dawn for the iGaming Industry in the United States - 19th Aug 19
Gold Set to Correct but Internals Remain Bullish - 19th Aug 19
Stock Market Correction Continues - 19th Aug 19
The Number One Gold Stock Of 2019 - 19th Aug 19
The State of the Financial Union - 18th Aug 19
The Nuts and Bolts: Yield Inversion Says Recession is Coming But it May take 24 months - 18th Aug 19
Markets August 19 Turn Date is Tomorrow – Are You Ready? - 18th Aug 19
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
GOLD BULL RUN TREND ANALYSIS - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Canadian Government Economic Stimulus Threatens the Loonie

Currencies / Canadian $ Aug 23, 2009 - 07:18 AM GMT

By: Money_and_Markets

Currencies

Best Financial Markets Analysis ArticleBryan Rich writes: caught its cold. And the currency of this key U.S. trading partner has since become a victim of the ebb and flow of global risk appetite.

For instance, last year, when uncertainty was high and money fled to the center of the global economy, the U.S. dollar and the Canadian dollar fell sharply.


Now that risk appetite has returned to the global financial markets and money is flowing back out of the U.S. dollar, Canada’s loonie has had a strong recovery. In fact, the Canadian dollar has rallied 20 percent against the U.S. dollar from its weakest point last March.

As for the economy, recovery is on track in Canada. But Canadian officials are worried about the recent strength of their currency. They’re concerned it has already dampened the path to recovery and could ultimately derail it.

Intervention Threats …

The governor of the Bank of Canada (the nation’s central bank) has said that a stronger Canadian dollar was a major risk to economic growth. And the Canadian finance minister has signaled that steps might be taken to dampen the volatility in their currency.

The loonie has had a strong rally. Now the government is threatening intervention.
The loonie has had a strong rally. Now the government is threatening intervention.

These are huge statements — attempts to influence market sentiment. Of course, the next step is physically doing something about it.

Official intervention is when a central bank (or an agent of the government) buys or sells foreign currency in an attempt to influence exchange rates. In the past, many governments have intervened in foreign exchange markets to try to:

  • Stop the appreciation of their currency,
  • Defend against the depreciation of their currency,
  • Or to simply slow the movement of its currency.

As you can see in the chart below, the Canadian dollar (the white line) has been dragged around by the “risk” trade and has been tracking the performance of the S&P 500 (the orange line) very tightly.

Canadia Dollar and the S&P 500

Source: Bloomberg

The S&P 500 has been the proxy for risk appetite and perception of economic recovery in the U.S. As optimism about the outlook for a global recovery has gradually improved since March of this year, so has the strength of the stock market … and, therefore, so has the strength of the Canadian dollar.

Fundamentals Point In Canada’s Favor …

The big Canadian banks managed to mostly steer clear of the load of toxic assets that crushed American and European banks. Its banking system was considered the world’s soundest last year … they required no new capital and remained profitable.

Canada implemented a $32 billion stimulus package to boost its economy.
Canada implemented a $32 billion stimulus package to boost its economy.

Even so, Canada recognized the exposure of its economy to the growing global recession and acted aggressively in coordination with five other central banks to begin slashing interest rates down to near zero. In addition, Canada rolled out a fiscal stimulus package.

Still, the economic consequences from recession have been harsh for Canada, as a neighboring country that relies so heavily on the health of the U.S. economy.

Indeed, the IMF expects Canada to contract 2.3 percent and then return to an anemic 1.6 percent growth next year. Those forecasts are expected to outperform the U.S. in both 2009 and 2010.

On a relative basis then, the Canadian dollar should be outpacing the U.S. dollar. But currencies aren’t trading on relative growth right now. It’s all about the risk environment.

So if you think the fundamentals of the recovery are robust, you might expect global stock markets and the Canadian dollar to go higher. Alternatively, if you think that there are growing question marks about the sustainability of the recovery, you’re anticipating that investors will rein in risk, and stocks and the Canadian dollar will go lower.

For clues, let’s look at …

The Technical Picture For the Loonie …

Below is a weekly chart of the U.S. dollar/Canadian dollar exchange rate. You can see the tight downtrend from 2001 to 2007.

For Elliott Wave aficionados, this chart looks very interesting. The five wave downtrend is now being corrected through an impulsive A-wave, a corrective B-wave and a potential impulsive C-wave that projects the U.S. dollar/Canadian dollar exchange rate toward the $1.50 mark.

In others words, the technical set-up indicates a rising U.S. dollar and a sinking Canadian dollar.

U.S. Dollar vs. Canadian Dollar (weekly)

Source: Bloomberg

The technical picture creates a viable bearish scenario for the Canadian dollar. And with the added element of intervention talk, betting on a lower loonie makes for an attractive risk/reward trade.

Regards,

Bryan

P.S. I’m now on Twitter. Follow me at http://www.twitter.com/realbryanrich for frequent updates, personal insights and observations from my travels around the world.

If you don’t have a Twitter account, sign up today at http://www.twitter.com/signup and then click on the ‘Follow’ button from http://www.twitter.com/realbryanrich to receive updates on either your cell phone or Twitter page.

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

Money and Markets Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules