Quote:
Originally Posted by John Kicklighter
Good points.
So far, this is a modest rebound in the grand scheme of the dollar's previous 5-year decline against the usual trade basket.
Technicals do work better for the short-term while fundamentals are good for the long-term (as they pertain to forecasting yield forecasts) and the very short-term in the typical news reaction.
I also agree that the USDCAD/Oil correlation isn't a hard fast rule (though people seem to always think it is especially when the first come across it) - especially when there are other dominate concerns floating around the market - interest rates most importantly.
However, I do have a few points I disagree on. First, the oil correlation has held statistical water over the long-term and I'm sure that the sharp drop in the CRB commodities index over the past week is helping to recharge the Canadian dollar's drop. Also, comparing the Switzerland to the US isn't really putting us on the apples to apples scale (really you can't compare any two economies on an even plain). The US is far larger than Switzerland with a very different financial and economic structure. The same can be said about matching the US to Canada. I have found that the most accurate gauge for spot direction is the difference in interest rate expectations (as a guide for investment returns) measured by both the overall level and expected level of change to that rate over time.
What do you see USDCAD doing through the short term?
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John, I have no problem with currency pairs over a long term (years/decades) being reasonably good indicators of the respective economies they relate to. But the Financial Post (FP)article (quoted by RBP) goes into a long list of very recent negative Canadian economic ails and then attributes these to the U.S. economy: "U.S. economy clips the loonie's wings". In Canada it's also a perennially popular theme to blame the U.S. for the movement of the loonie as follows: if the U.S. goes into recession the CAD should go down due to reduced demands for Canadian exports. At the same time many analysts expect the CAD to go down once the U.S. economy improves. I read this opinion everyday. If you add these two views you have to conclude that the CAD should go down regardless how the U.S. economy performs.
I brought up the USD/CHF pair as an example how absurd the FP argument is by pointing out that the Swiss economy is booming yet in synchron with the USD/CAD the USD/CHF also increased by about 5% in less than a week. We cannot use economic argument such as: "U.S. economy clips the Swissy". Swiss trade with the U.S. is marginal compared to Canada's trade with the U.S. and the same can be said with respect to the EUR/USD which also underwent a small decline from 1.60 to 1.54. But what did it used to be some years ago? Near 1.1. Now that's a significant economic indicator and again it is the long term.
And yes, you are absolutely right to disagree when it comes to correlating CAD to oil prices. I guess I should have said that again I was talking short term. I wanted to emphasize that short term, even huge oil price changes (30-50% as recently) do not predict which way the USD/CAD will go and I used that extreme example of 90 USD oil versus USD/CAD = 0.91. Compare that again with near 150 USD oil but USD/CAD = 1.02 (about) some weeks ago.
If the FP meant that the dire U.S. economy is finally "clipping" the "high-flying" loonie then there is truth to that. Especially in view of the almost histerical cries by Canadian politicians and union leaders that the CAD should go down. It's also a fact that the "high" loonie is more than a thorn in the eye of many in the U.S. I suspect the reasons are not merely financial.
So, to answer your last question as to what I expect will happen to the USD/CAD. It will go down short term and 1.10 1.15 is likely in the short term After all that's what everybody wishes. And self-fullfilling prophesies are not unknown in the currency markets (just look at the success of some Fibonacci afficionados) But again, I'm talking strictly short-term.
Regards to all