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Markets Confused about Canadian Dollar

On a trade-weighted basis, the Canadian Dollar (aka Loonie) has appreciated nearly 10% in 2010. At the same time, it has fallen 8% against the Dollar since the beginning of May. This contradiction is reflected in an explosion in volatility: “CAD has been very volatile – the average intraday spread between the high and low in CAD over the last 21-years has been 83 points; over the last month it has been 182 points.” How can we make sense of this uncertainty, and which trend is ultimately more representative?

CAD USD 1yr

On the one hand, the Loonie continues to be thought of as a commodity currency whose rise and fall is closely linked to fluctuations in the prices of certain raw materials. “It’s not just about oil any more, but also natural gas – whose price has carved out a bottom – and precious metals, which command a 13-per-cent share of the TSX’s market cap versus less than 1 per cent for the S&P 500,” observed one analyst. From this standpoint, it’s perhaps not surprising that a 7.2% drop in the Raw Materials Index was matched by a proportional drop in the value of the Loonie.

On the other hand, the Loonie is being punished by the Eurozone debt crisis and the consequent flight to safe haven currencies: “The Canadian dollar is following the risk aversion tones of the market.” While the Loonie might have otherwise been “been closer to parity” then, it’s understandable that the so-called “panic trade” is holding it down.

In light of the Eurozone debt crisis, however, one might have predicted that commodity currencies would rally, since they are perceived as being backed by something more tangible than government fiat. In fact, some analysts believe that the comparatively modest decline in the Loonie implies that this is indeed the case: “It was fascinating to see the Canadian dollar only correct down to 92 cents during this most recent round of global financial turbulence and flight-to-safety. That is a far cry from the correction down to 78 cents following the Lehman aftershock, not to mention the move down to 62 cents after the tech wreck a decade ago.”

The same analyst pointed out that the notion of the Canadian Dollar as a safe-haven currency is further justified by Canada’s strong fiscal condition. It is trimming its spending, cutting taxes, and may even reduce its national debt. Meanwhile, it’s financial system remains robust, as evidenced by the fact that none of its banks have required government bailouts. Thus, Canadian sovereign debt has continued to appreciate in spite of the crisis across the Atlantic. In short, “The federal government actually deserves the triple-A credit rating that it receives on its debt.”

Going forward then, the near-term performance of the Loonie will depend both on the EU sovereign debt crisis and commodities prices, which in turn are high sensitive to (perceptions of) the global economy. In this latter aspect, there is tremendous uncertainty. The Canadian economy did grow at 6% last quarter. However, “The fear is that weaker U.S. data is posing a risk to the Canadian economy. And the G-20 is really focused on fiscal restraint as opposed to supporting growth. That probably isn’t good for the growth currencies.”

Furthermore, there are implications for the Bank of Canada, which has already embarked on a tightening of monetary policy. It raised its benchmark interest rate – becoming the first industrialized economy Central Bank to do so – to .5% in June, and there is a 45% chance that it will do so again in July. The futures markets are currently pricing in a benchmark rate of 1.25% by year end. Ultimately, “The extent and timing of any additional withdrawal of monetary stimulus would depend on how the outlook for economic activity and inflation evolves.”

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Posted on July 18, 2010
at 10:47 am
Written / posted by: Simon
Filed under: Breaking News, Credit Crisis, Currency Trading, Traderz Warning!

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Posted on March 24, 2009
at 11:15 am
Written / posted by: Simon
Filed under: Breaking News, Currency Trading

While it would be easy to dismiss this move by the People’s Bank of China to inch away from dollar based invoicing, the fact is that the use of other currencies for denominating trade transactions has been on the rise.
The chief executive of jewellery giant De Beers SA made waves this week when he suggested the global diamond industry consider pricing the shiny gems in a currency other than the U.S. dollar.

That comment, from the head of the world’s largest diamond company, is the latest in a string of signs that the greenback’s glory days could be fading.

A UBS Investment Research report says that while it would be wrong to write off the U.S. dollar as the global reserve currency, its roughly 90-year iron grip on that position is loosening. “The use of the U.S. dollar as an international reserve currency is in decline,” said UBS economist Paul Donovan.

“The market share of the dollar in international transactions is likely to decline over the coming months and years, but only persistent policy error – or considerable fiscal strain – is likely to cause the dollar to lose reserve currency status entirely.”

The UBS report maintains that the gradual slide of the U.S. dollar is being driven not by the world’s central banks, but by the private sector, as individual companies increasingly abandon the greenback as their international currency of choice.

“The private sector’s use of reserves is more important than official, central bank reserves – anything up to 20 times the significance, depending on interpretation,” Mr. Donovan said. “There is evidence that the move away from the dollar as a private-sector reserve currency has been accelerating since 2000.”…
A Financial Times story in March said that Chinese exporters in particular were leery of the greenback:
Rising numbers of Chinese exporters are shunning the US dollar or devising ways to offset the impact of the falling currency as they confront rising labour and raw material costs at home.

According to Alibaba.com, the online company that matches Chinese suppliers with international buyers, the vast majority of their almost 700,000 Chinese suppliers no longer use dollars to settle non-US transactions in order to minimise foreign exchange risk.
So one could read the pending PBoC pilot of a yuan-based trade settlement system as a response to realities on the ground. But there have also been US reports of far more fundamental discontent with the dollar, per

The New York Times Reports in August:
Victor Shih, a specialist in Chinese central banking at Northwestern University, said that when he visited the People’s Bank of China for a series of meetings this summer, he was surprised by how many officials resented the institution’s losses [on dollar assets].

He said the officials blamed the United States and believed the controversial assertions set forth in the book “Currency War,” a Chinese best seller published a year ago. The book suggests that the United States deliberately lured China into buying its securities knowing that they would later plunge in value.

“A lot of policy makers in China, at least midlevel policy makers, believe this,” Mr. Shih said.
And Reuters reported a more frontal attack in October in an article that appears likely to have been sanctioned:
The United States has plundered global wealth by exploiting the dollar’s dominance, and the world urgently needs other currencies to take its place, a leading Chinese state newspaper said on Friday.

The front-page commentary in the overseas edition of the People’s Daily said that Asian and European countries should banish the U.S. dollar from their direct trade relations for a start, relying only on their own currencies…

The People’s Daily is the official newspaper of China’s ruling Communist Party. The Chinese-language overseas edition is a small circulation offshoot of the main paper.

Its pronouncements do not necessarily directly voice leadership views. But the commentary, as well as recent comments, amount to a growing chorus of Chinese disdain for Washington’s economic policies and global financial dominance in the wake of the credit crisis.
So seen against this backdrop, the pilot program looks to be part of a more concerted effort to reduce exposure to the dollar, even if it is not very significant in isolation.

From the Shanghai Daily (hat tip reader Bill):
China’s central bank said yesterday that it plans to implement a pilot program that would settle overseas trade with the Chinese currency instead of the US dollar.

The People’s Bank of China will expand financial cooperation with overseas economies and “properly deal with the global financial crisis,” the central bank said.

“We’ll actively join international efforts to tackle the global financial crisis while safeguarding national interests,” the central bank said…

China will allow the yuan to be used for settlement between Guangdong Province and the Yangtze River Delta, China’s two economic powerhouses, and the special administrative regions of Hong Kong and Macau, according to the central bank.

Meanwhile, exporters in the Guangxi Zhuang Autonomous Region and Yunnan Province in southwestern China will be allowed to use the yuan to settle trade payments with members of the Association of Southeast Asian Nations.

Those moves are expected to facilitate overseas trade, as Chinese exporters might face losses if they continue to be paid in US dollars, analysts said.

The dollar’s exchange rate has become more volatile since the global financial crisis began.

The central bank said it will make the exchange rate of the yuan more flexible and keep it “basically stable on a reasonable, balanced level.”

There has been speculation that the yuan’s appreciation will slow down, which would help Chinese exports maintain price advantages in overseas markets.
Note that China has been arguing for a fixed currency regime for some time. From their perspective, it makes perfect sense. Currency volatility is a deterrent to trade, since it increases uncertainty.

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Posted on January 12, 2009
at 2:39 pm
Written / posted by: Piere
Filed under: Breaking News, News, forex trading

The Fed is officially in panic mode, having lowered its benchmark federal funds rate close to zero and exhausted all of the tools in its monetary arsenal, with one notable exception: its printing press. In other words, the Fed is trying to jumpstart credit markets by acting as a market participant- investing funds to compensate for the reticence of private investors. Capital markets are naturally enthusiastic about this policy, since some of the new cash will probably be used to make leveraged bets on asset prices and erase some of the losses of the last year. Forex markets are palpably less excited that the Fed has essentially eroded much of the impetus for foreigners to hold their ash in the US, with paltry short-term yields and long-term gains that will likely be offset by inflation. Unless foreign Central Banks follow suit and eliminate the current interest rate disparity with the US, it could be a bumpy 2009 for the Dollar.

Citi Analyst Steven Wieting opined: “If you want yield, you’ll have to take some risk.” With borrowing rates suddenly close to zero and the Fed saying it will keep them at “exceptionally low levels … for some time, you’ll get as little of it from government-issued debt as possible.”

We Forex Traderz can implement this piece of information in many strategies. Choose yours carefully because you can’t be sure of anything these days…

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Posted on January 3, 2009
at 3:49 pm
Written / posted by: Simon
Filed under: Breaking News, Currency Trading

The Australian dollar has closed lower, falling below $US0.6400 as weaker equity markets overshadowed a short-lived bounce from another big interest rate cut by the RBA. At the 5pm local close, the dollar was trading at $US0.6358, down 1.1 US cents, or 1.7%, from Monday’s close of $US0.6467. During the day, the local unit traded between a low of $US0.6337 and a high of $US0.6470. The local currency advanced about half a US cent shortly after the Reserve Bank slashed the cash rate by 100 basis points, or a full percentage point, to 4.25%.

“There were some in the market who were expecting a far more aggressive cut and had gone short on the Aussie dollar,” said Tony Morriss, senior currency strategist at ANZ.

But the rally was short-lived as attention quickly returned to weak Asian equity markets, which dampened appetite for high-yielding assets such as the Australian dollar. A senior currency strategist at financial markets research group Forecast, Lee Wai Tuck, said investors remained nervous after the poor finish on Wall Street.

“Market players are still conscious about the downside risks in stock markets,” Mr Lee said from Singapore.

The benchmark S&P/ASX200 index closed down 4.2%. It was a similarly bleak picture across Asia, with all the major bourses in the red. Mr Lee said the October retail sales and the September quarter current account deficit data had little effect on currency markets.

“Overall, the focus is still very much on equity markets,” Mr Lee said.

Heightened risk aversion was also reflected in the Australian dollar’s performance against the Japanese yen – the local currency was trading at 59.24 yen, down 3.8% from Monday’s close of 61.57 yen.

I expected the Australian dollar to remain under pressure during the overnight session. Take that in notice guys.

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Posted on December 3, 2008
at 11:21 am
Written / posted by: John
Filed under: Breaking News