Ralph Shell @ 2:03 PM, Tuesday February 01 2011
On Friday when the world was apprehensive about chaos in Egypt, and the possibility of other Mid-Eastern uprisings over the week end, the Canadian dollar sold off to parity versus the USD. The Egyptians control the Suez Canal, the route for about 3 million barrels of daily oil shipments, and the spike in oil prices were not a surprise. Since Canada is a good neighbor producer of over 3 million barrels a day, the weakness in the loonie was a bit curious. On Monday there was some churning in the forex market, but since then the loonie has since turned around, joining the rest of the world today, and firming against the USD.
The military dictatorship in Egypt has been entrenched for decades, providing peace and stability, though not prosperity. For the 77 millions Egyptians, food must be imported since their own production is insufficient. The government has subsidized food prices for years, relying on US foreign aid and receipts from the production of Egyptian oil. Unfortunately their oil production has been declining, substantially down from the 922,000 barrels/day in 1996. US aid has remained generous, approaching $2B per year, but with food prices soaring, the supply of food has gone down and the price has gone higher.
The US is an agricultural exporter, benefiting from the higher prices, but the higher oil imports dwarf the receipts from exports or wheat corn and soybeans. Monthly energy purchases by the US average about $20B per month, and are climbing with the increased crude price. US energy policy consists of dreamy hallucinating for an organic, clean, and of course, cheap source of energy which is non-existent. The expanded production of any traditional source of energy is obstructed or forbidden by Washington, so we continue to give massive amounts of money to people who, mostly do not like us.
Canada has benefitted from an enlightened policy which has encouraged development of the Athabasca tar sands. This has been a factor in the strength of the C$, as the speculators have loaded up on the long side. Recently,
comments from Canadian officials that parity with the USD is going to provide a head wind for the manufacturing sector probably chased out some of the longs when the market retreated to 100.50 on Monday, but that has reversed today.
This is a busy week for US and Canadian economic reports. On Monday the Canadian GDP increased to +0.4 on a monthly basis, better than expected and the previous period. The Canadian RMPI showed a monthly increase of 4.2%, a more realistic assessment than the US core PCE price index of 0.0% change. On Friday we get the unemployment rate, expected to be 9.5% in the US, and the Canadian unemployment rate, expected to be 7.6%. Guess for the US Non Farm Payroll are up 133k, this report is always a surprise.
While the US and Canadian economies are closely intertwined, there is probably reason for the C$ to trade at the premium to the USD. Today the C$ has gained on the USD, probably because the USD is being hammered versus the other major currencies. Should the USD selling abate, and the C$ move back to the 99.50 level, let's sell the USDCAD. Though the market has stalled here, the longer trend is down, with a move back to the 95/96 level is possible.
Today the USD is being sold
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.