Ralph Shell @ 1:20 PM, Tuesday January 19 2010
While the Bank of Canada was satisfied with the current rate of economic growth, they felt the level of economic activity was not sufficient to increase the benchmark rate from the current .0025%. This was not a surprise, but comments that a rate increase would be unlikely until the end of the second quarter may have disappointed some of the loonie bulls. The Cad did weaken toward the 1.0350 level, but then steadied in the 1.0325 area. The Canadian leading indicator report did improve quite nicely, up 1.5% versus an expected 1.1% and 1.3% in the previous period so maybe some of the bankers caution is unwarranted.
Geography makes the US and Canada very important trading partners. In excess of 80% of Canadian exports move into the US, and the historical discount of the Cad has been a big advantage to Canadian manufacturers. While US demand for Canadian oil is brisk, demand for Canadian produced cars is not. The US construction recession has hurt demand for Canadian lumber, and the global contraction of the newspaper industry had reduced, probably permanently, the demand for paper. As you can see the demand for all commodities is not equal.
Speculators have had a robust appetite for the loonie. In the latest COT report the large speculators held 60,689 contracts of longs and only 11,598 contracts of short, while the small spec was long 45,875 long and 19,650 contracts short. Certainly the Cad does have a bullish story, but we wonder where the new listeners, and buyers, are going to come from. The price for the pair has meandered sideways, failing to move in new highs of the Cad versus the USD, and certainly testing the patience of the bulls.
Yesterday it was reported that November purchases of foreign securities in Canada was 10.54B more than the expected 5.23B. Capital inflows such as this cause demand for the currency and is a positive ingredient when determining relative values. The USD was not to be outperformed, however, confirmed by the TIC Long Term Purchases of US assets released by the Treasury today. The report showed 126.8B purchases, far in excess of the projected 30.3B and the 19.3B in the previous month. Foreign purchases of US notes and bonds were $118.3B during November. The current US yields in the US 30 year bond is 4.60%, a premium to the 4.06 yield in a similar Canadian maturity.
A bond yield advantage may not be as glamorous as oil reserves but it looks like the foreign investors are still interested in buying US Treasury debt. With in excess of $1.5T to be auctioned off this year there will be not shortage.
Perhaps the short term break in the Cad has maxed out in the 1.0320 area, but the inability to make new highs on the Cad versus the USD makes us a little bearish toward the loonie. Lets try to long side of the USD on a pullback in the 1.0290 area, risking 100 points.
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.