Canadian Dollar Trades Close to USD Parity, What is Next?

Ralph Shell @ 2:15 PM, Tuesday December 14 2010

On numerous occasions during the past year the C$ has visited the level of parity with the USD, and then retreated from that hallowed level to the safety of a modest discount. As the loonie, once again begins to challenge parity, Bank of Canada governor Mark Carney has some negative comments about the status of the Canadian economy.

Sounding like a disciple of Fraulein Merkel, Carney warns that Canadian consumers are racking up debt faster than their disposable income is growing. For the first time in 12 years, Stats Canada reports Canadian households have a higher debt to income ratio than their southern neighbors, a record 148%. Cheap interest rates, have of course, stimulated the expanded consumer borrowing, and some experts are worried this story will have an ugly ending.

In today's Financial Post, David Rosenberg had these comments:

"There is absolutely no question that Canadian household balance sheets eerily resemble their U.S. counterparts of roughly three to four years ago," said David Rosenberg, chief economist at Gluskin Sheff & Associates. "Who's fault is it? It's easy to point fingers at this politician or this central banker when we should probably all just grow up and behave like adults. It comes down to prudent decision making on the part of the lender and the borrower."

Mr. Carney's Toronto speech, where he warns against over-extension of consumer debt, has some analyst speculating he is setting the stage to increase rates. Contrast this prospect with the anticipated US Fed's FOMC Statement today. Bernanke and his group is expected to keep rates low and the money supply ample until the unemployment rate comes down, and that might be a long time. It is also expected that the QEII monetary expansion program will remain in place. Could this be a set up for the C$ to go to a premium over the USD?

Past attempts by the C$ to go premium to the USD have encountered major resistance around even money. The Canadian exporters have for years enjoyed the advantage of the discounted C$, which gives them a competitive edge. They, with the Canadian financial institutions, have in the past, seemed to be sellers of the C$ around parity. As we approach parity it will be interesting to see if the market is able to chew through the resistance.

As an alternative to buying the C$ versus the sale of the USD, perhaps traders should look at a cross versus the yen. The Japanese economy is struggling, and the threat of higher global interest rates, would not bode well, should that increased rates reach Japan. Further the Japanese government is opposed to a strong yen which hurts their exports. The C$ has been creeping higher versus the yen since the bottom made in late October a little under 79. The current trade is around 83. Should we have a pull back toward the 82.50 level, try to buy the CAD/JPY for a move out to the 85 level.

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.

Categories: US Dollar, USDJPY, USDCAD, Crosses & Minors

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Canadian Dollar Trades Close to USD Parity, What is Next?

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