USD/CAD: Headed Higher?

The US and Canada both released trade numbers this morning. The US reported a smaller trade deficit while Canada reported a larger one US Trade Deficit Shrinks, Canada Reports First Deficit in 32 Yrs.

Here are the trade charts courtesy of FX360.com (each piece of economic data has historical charts)

US Trade Balance

US Trade Balance

Canadian Trade Balance

Canadian Trade Balance

The currency to watch is USD/CAD. From a trade flow perspective, a shrinking deficit in the US and an increasing deficit in Canada could spell more gains for USD/CAD. The currency pair is currently trading right below our Bollinger Band buy zone and if it closes above 1.2515, we could see a move to 1.28.

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2 Comments

  1. I agree, from a fundamentals perspective, too.

    1) CAD oil comes from expensive sources like shale, and the break-even production cost I’ve read is nearly $80/bbl. They won’t be able to compete with the lower cost producers. In addition, Obama’s LCFS policy will make tar sands oil unsaleable in the US. Lastly- a loss of $200B in planned Alberta energy investments will destroy more jobs.

    2) Other exports
    a) Ontario auto parts is 18% of all CAD exports. That’s probably not doing so well
    b) BC wood products. with the housing boom over, demand is way off

    3) For the first time in over 20 years, their gov will be running a deficit. up until now, CAD has been a dual surplus (budget balance and current acct balance) country. it might very well become (albeit slightly) a dual deficit country.

    4) Unemployment now at a 4 year high- 7.2%

    5) lastly, compared to the other comdoll, AUD, CAD has much higher unemployment (7.2% vs 4.5%), and much lower GDP growth (0.5% vs 1.9%) and much lower central bank rate (1% vs 3.25%). so in the event of a resurgence in risk, CAD should not recover as fast or far as AUD

    Reply
  2. and one last perspective- the market makers (folks who have more info than us retail folks)
    1) are pricing in higher volatility on calls than puts.
    at Saxobank, the implied vol on ATM calls is about 20.5%, whereas on ATM puts its about 17.5%. That’s a huge difference (and possibly an arbitrage idea), and lets you know they believe its headed uphill.

    2) Chicago Mercantile futures weekly change indicates that the shorts are growing, relative to the long positions in CAD

    my 2 cents.

    Reply

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