Ralph Shell @ 2:17 PM, Wednesday June 09 2010
The fate of the C$, at least over the short term, does not appear to be caused by Canadian events. Last Friday we had positive reports from Stats Canada. The employment change came in a positive 24.7k, unemployment unchanged at 8.1% as expected, and new building permits came in much better than expected. The C$, however, was overwhelmed by the negative US Non-Farm Payroll, and the subsequent rout in equities, with the loonie weakening from 1.04 to 1.06 after the reports.
The market traded cautiously on Monday, afraid further bear news in the US or Europe, would further weaken the loonie. The stability of equities, and the subsequent rally followed by the strong recovery in the crude has returned the pair back to the 1.04 handle. Today's strength came in part from a report that Chinese exports were 50% ahead of those last May.
The crude market is quite firm today as Secretary of the Interior Ken Salazar, following instructions from President Obama, ordered a "thorough environmental analysis and scientific study" of the drilling. It is claimed this drilling moratorium, which will shut down 33 rigs currently working in the Gulf, will last for six months. Off shore oil production accounts for 30% of the US production of oil and gas. This supply will need to be replaced elsewhere in the world, with Canada, of course, being one of the beneficiaries. The new drilling limitations applies to wells in over 500 feet of water. Many of the areas less than 500 feet are close to shore where drilling is not permitted. Despite having safely drilled thousands of wells, the industry is now being subjected to a bureaucratic review. Considering the snail pace that Federal bureaucrats work, a six month moratorium is a joke. More likely it will last until there is a spike in oil prices that outrages the public.
Over a period of time this change in US policy is friendly the C$ against the USD, but with a myriad of other influences for this pair, it is hard to know when the impact on price will be recognized. We do know the combination of the BP spill and the government's moratorium in the Gulf will cause severe economic contractions in the region affected, and higher oil prices in the US will hurt the entire economy.
The rally back in the C$ has stalled in the 1.04 area and is now back tracking a bit. We prefer the short side of the C$ versus the USD and would sell the pair on a retrace back to the 1.05 handle.
Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.