The News & What it Means – Canadian Dollar Quiet, but Building Energy?

By John DePutter & Dave Milne – November 14, 2018

 

The news:

“The Canadian Dollar is lacking a clear narrative to drive it in one direction or the other at present, according to strategists at Toronto-headquartered BMO Capital Markets, who say the Loonie could remain in a “flat range” until the US Dollar index tops out and goes into reverse.”

– Pound Sterling Live, Nov. 9, 2018

 

What it means:

If accurate, it would mean more of the same.

 

Since the beginning of this year, the Cdn $ has chopped mostly sideways, generally trading within a modest 6-cent range, between a high of around 81 cents and a low of 75 cents US. That compares to a year earlier, when the loonie traded within an approximately 10-cent range, and in 2016 when it started the year around 68 cents before eventually hitting its high of about 80 cents in the spring.

 

 

It’s true the Canadian dollar just hasn’t done much this year compared to both 2017 and 2016, so some high level economists and forecasters assume it will stay quiet.

 

There’s more to the story.

The truth is, when a market is quiet for a stretch of time, it is often turn out to be building energy for a big move.

 

It’s important to understand markets have a knack for putting people to sleep and it’s when most in the crowd expect nothing big to happen that something big does suddenly happen.

 

The problem is, it’s hard to nail down the timing of a move out of quietude, and it’s equally hard to know in advance whether the breakout will be up or down.

 

So what’s causing the sleepy Canadian dollar action?

Perhaps the best answer to that question is offsetting forces.

 

On the bullish side, here’s one key factor: A steady rise in Canadian interest rates.

 

Last month, the Bank of Canada raised its trend-setting overnight lending rate by another quarter point to 1.75%. That represented the fifth such increase since the summer of 2017 and took the Bank’s rate to its highest in a decade. When investors are looking around the world for a mix of safety and return, Canada’s slightly higher interest rate along with perceived political and economic solidity, are attractants for capital.

 

On the other side, a bearish factor offsetting the impact of rising interest rates has been softening oil prices. On Monday, US crude oil prices fell for the 11th consecutive trading session, the longest losing streak since the contract began trading in 1983.

 

Rising global oil production and a softening in US oil sanctions on Iran, that included waivers for big crude importers like China, have contributed to the woes for oil, a major Canadian export upon which the domestic economy depends.

 

Interest rates and oil aren’t the only issues…

In the neutral category is the conclusion of nearly 13 months of negotiations on a new free trade deal between Canada, the US and Mexico. That might be construed as bullish, except that it has a long, obstacle-littered path ahead through the US political system, before it is fully approved and put in place.

 

Yet another factor to monitor is the trend of the US dollar against various other currencies. Often when the US dollar is trending up against most non-US currencies, as it is now, the Canadian currency will be among those that lose ground. When American money is weakening against various others, Canada’s money will usually take a firm to higher path relative to the US

 

A critical market for farmers.

Someday the Cdn $ will enter a major trend against the US currency, and the trend will have a significant impact on crop prices, livestock prices, and profitability.

 

The Ag-Alert service (for Ontario & East) and the DePutter Market Advisory Service comment regularly on the Cdn $. We hope to help our subscribers get on the right side of the next big trend.

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