Loonie Continues to Disappoint the Bulls.

Since October the Loonie bulls have had their sites of parity with the dollar, only to have market fall short of their objectives. Central Bankers expressed concern that the strong Cad would hinter the recession recovery, but this did not deter the speculators from accumulating big longs in the futures market.  At one time the open interest in the Cad futures market was larger than all other futures contracts except the euro.  The large specs, probably fund longs playing the commodity currency theory, gradually peeled out of their big positions.  Small specs, however, have remained.  The COT report as of February 2nd showed they were still long 40.9% of the total open interest.  Total open interest, though, has been reduced, so you would think that those remaining are true believers in the loonie.

Part of the optimism for the loonie rests in the aggressive development and production of oil, but the recent reductions in oil prices may have deflated some of the commodity bull's expectations.  It is peculiar that the oil market is not stronger considering  the huge dose of severe weather plaguing most of North America.  In years prior this would have widened the spread between heating oil and gasoline to where oil refiners, operating at higher rates, would consume more oil.  A modest two cent premium, heating oil over gasoline, when the US Northeast is suffering from a severe winter is strange.  Since commercial air and ground transportation are large consumer of distillates, the weak prices suggest we are not very far down the recovery road.

This morning Federal Reserve Chairman Ben Bernanke, doing an impression of Alan Greenspan said:
"The sequencing of steps and the combination of tools that the Federal Reserve uses as it exits from its currently very accommodative policy stance will depend on economic and financial developments," Bernanke said in written testimony.

So according to the Fed chairman somewhere down the road when conditions are right, they will make adjustments, draining liquidity and raising short term rates.  Let us not hold our breath.  Though the Fed is theoretically independent of the US Government, we doubt the Fed will be quick to increase rates when the Government has such a voracious need to borrow money.  In addition to the massive deficit, the government has taken over billions of obligations in bad bank loans, poorly run car companies, and overpriced real estate.  This transfer of private bad debts to the public sector gives aid to some, spreading financial responsibility to the general public.  This does not seem like a recipe for a quick recovery. 

The loonie has been trapped in the 1.03 to 1.0750 trading range for the past several months.  There has been recent pressure on the loonie as the stale longs hit the exits, and the dollar, during this period, had benefited as dollar shorts covered. Lets try to try the long side of the loonie by selling the USD versus the loonie in the 1.0650 area, risking 75 pips.  While we doubt the pair can mount an attack on the 1.0204 low, a return to the 1.04 level is a possibility.

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.