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.”

“While there was applause for the (Fed) cuts…investors are now standing back and reflecting further on what that means,” said…an analyst. “Some nervousness has been expressed in the currency markets. We have seen a weakened dollar, which has probably had an effect on the markets across the board.”

The Fed under Ben Bernanke hasn’t sat on its hands as the financial crisis has unfolded. Bernanke, who took the Fed’s helm in February 2006, just as the crisis was beginning, has been the most activist Fed chief in history — all but guaranteeing that the Fed, like a good soldier, won’t stop firing until all its ammunition is spent.

Ben Bernanke honors his nickname by pledging to do everything in his power to stimulate the flow of money, short of literally dropping Dollars from the sky. Capital markets naturally reacted to this policy prescription with delight, as some of the surplus Dollars will certainly be used to bid up and stock and bond prices. Currency markets, on the other hand, were not so complacent, sending the Dollar back down from the depths from which it only recently emerged. In other words, zero-interest rates and a surfeit of dollars hot off the printing press has analysts and forex traderz wondering aloud about who will be foolish enough to want to own Dollars in the future.

A day after the Federal Reserve adopted a near zero-interest rate policy to stimulate the economy, the euro jumped as much as 4 cents against the dollar, the largest single-day move since the euro’s birth in 1999. Against the yen, the dollar tumbled to 87.14, the lowest level in 13 years. The dollar was also weaker against the pound and the Swiss franc.

The dollar — which on Wednesday rose as high as $1.44 against the euro from $1.39, before closing at $1.43 — had enjoyed a surprising rally since September, after Lehman Brothers’ collapse forced hedge funds and other big investors to liquidate assets and return money to the United States.

The Dollar continued to strengthen even after the government’s initial plan to shore up the financial system foundered, reaching as high as $1.2453 on Nov. 20. That counterintuitive shift seemed to highlight the dollar’s role as a safe haven store of value in times of crisis, despite the recession. Things are bruising and shifting towards exactly the opposite side right now.

But the dollar’s brief appeal in recent months mainly reflected a lack of better options. While much has been made recently of the euro as a new rival, the currency used by 15 European economies has weakened as recession struck the Continent. At the same time, Japan and other powerhouses in Asia quickly succumbed to a global deceleration.

And while some economists are predicting a mild recovery in the second half of 2009 as the Fed’s actions and a $700 billion stimulus plan promised by President-elect Barack Obama raises demand, unemployment could yet hit double-digits.

Taken together, the effect is one of greater downward pressure on the dollar — a dynamic that economists expect will continue for the foreseeable future. Currencies normally reflect the underlying fundamentals of an economy, and slow, controlled declines or gains allow businesses and investors to plan rationally for the future. But even by the standards of currency markets, the whipsaw nature of the dollar’s recent movements has come as a shock to many investors who expected the dollar to stabilize at a stronger level.

http://www.nytimes.com/2008/12/18/business/worldbusiness/18euro.html?ref=business

“The global backdrop is bearish for the Canadian dollar and domestic numbers are merely piling on,”said a senior currency strategist. “No one is looking for reasons to buy the Canadian dollar right now. They want reasons to sell.”

At this moment the situation is so that if a large bank falls, no ‘rescue plan’ will be good enough to save that bank. Each ‘rescue plan’ could lead to hyperinflation. Fortunately, it is also quite possible to bank without banks!

The Basic banks were a kind of market that mediated between borrowers and savers and we need to go back to that principle. A modern bank with its FRACTIONAL reserve principle, is unnecessary and dangerous. Ultimately, the fractional reserve principle was created so that banks could issue more loans and thus make more profit. Our banks can and are receiving interest on money they don’t have or own because they switched to this fractional reserve principle. A central bank is completely unnecessary, such institution solely exist in the grace of inflation and deflation.

Anyway, eventually, if you look trough all misleading constructions of modern banking its quite simple. Is it not high time for something new?

With the advent of modern means of online communication and collaboration, Web 2.0, it is very easy to continue without banks.

An alternative way of getting a loan: Social Banking.

Characteristic of Web 2.0 communication and collaboration means is that the facilities allow users themselves to produce results. Think of Wikipedia, Youtube, Digg, and so on. They are all so-called crowd-sourced systems with user-generated content, which means that visitors will do all the work. The concept I’m trying to get to is called Peer-to-Peer banking. At this time quite a number of successful Peer-to-Peer social banking systems have already been set up and and the conditions are better than normal banks. A peer-to-peer banking system is a market place where people directly borrow and lend money to each other. People can operate on mutually desired conditions. The best-known peer-to-peer bank is Zopa which already claims their safer than banks.

“There’s no smoke and no mirrors – unlike at a bank. Because banks use your money to make even more money for themselves. They lend some of it out, some gamble on the price of tin or the depreciating yen, and invested the rest in any other money-making schemes they can think of.“

Starting with social banking is simple. Its not harder than selling or buying stuff on Ebay. When you sign up for social banking your reliability and  identity will be checked carefully and you can only lend or borrow money when you have passed these tests perfectly. There are mechanisms to indicate how long you want to lend money and at what rates, in order to estimate reliability and to spread risks. When you don’t pay back lenders, just like any other defaulter, will get you an angry-looking team Yugoslavia’s in front of your door.

The benefits are enormous. Everyone knows exactly where his money goes and where it comes from. The return on savings is higher, partly because there are no expensive banks involved. 

At this moment, Peer-to-Peer banks have the disadvantage users will not be protected from the massive devaluation of the currencies, but In principle, the concept itself is very suitable for on the basis of a new currency to replace traditional banks. 

With its own currency and a smart implementation of the peer-to-peer banking concept, we could now do without banks. Think about it people and spread the word.

Unlike previous trading sessions, where the yen moved in a unison with the U.S. dollar as both were considered to be «safe haven» investments, now the yen is winning and the dollar is losing greatly. The  U. S. currency suffers from the big troubles with its economy — high job losses, low consumer, production and service sentiment indexes and now the possible downfall of the biggest automakers.

The yen looks more attractive than the U.S. dollar and some higher yielding currencies because Japan didn’t receive the same damage from the global financial crisis. And now the traders also shouldn’t be afraid of the currency intervention from the Japanese monetary authorities as Finance Minister Sh?ichi Nakagawa said today.

USD/JPY fell from 91.45 to 90.44 as of 9:32 GMT today after reaching as low as 88.60 — the lowest level since August 1995. GBP/JPY declined from 137.54 to 135.42, with the daily minimum lying at 133.16 — the lowest since June 1995. EUR/JPY didn’t break any significant records today but fell from 122.06 to 120.95 with the daily low at 118.21.

China says its reserves are continuing to rise, with the chief economist at the National Bureau of Statistics telling Reuters they would exceed $2 trillion by the end of the year. Beijing [will] not resort to “panic selling” of reserves, instead maintaining a “prudent and responsible” stance.