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Blue Light Special on Canadian Dollar Won't Last Forever

By    |   Wednesday, 29 February 2012 09:28 AM

I usually write about the value of investing in stocks and investments overseas. I talk about the potential value of international stocks as well as sectors and countries.

We talk about the macroeconomic picture and often lament the interference of politics and politicians in business.

Today I want to talk to you about an amazing opportunity that I see in the currency of our neighbor, Canada, and its dollar.

The Loonie, as it is fondly referred to, is a currency that is driven by commodity values and the Canadian economy is driven by commodity exports.

Canada is rich in oil, gold and various other industrial commodities. The exports are largely influenced by the value of these commodities which also help keep the deficits in check.

Canadian Dollar (CAD) values are affected directly by the price of gold and oil in the international markets. Often time, investors would buy CAD as a proxy to buying the commodities directly.

In the recent run-up of oil prices in the world, and with gold just shy of $1,800 per ounce, I would have expected the CAD to soar. This hasn’t happened yet.

The Canadian dollar just broke parity against the U.S. dollar but hasn’t risen to levels we should have seen based on the moves in gold and oil.

The chart below shows you the close correlation between the Canadian dollar and oil. The green line indicates oil prices while the black line shows the CAD prices. In the recent past, we have seen oil soar but haven't seen the CAD move that much.

Story continues below chart.

Click to enlarge chart

Something isn’t right here. The correlation cannot stay separate for too long. Either the price of oil will come down or we will see the CAD soar.

My guess is that the price of oil isn’t coming down anytime soon. The war rhetoric between the West and Iran isn’t about to calm down. Both sides seem to want to play the brinksmanship game and see how far they can push each other.

This high level of anxiety and fear is also leading to gold prices soaring, which is CAD-positive news.

Further, I am seeing clear signs that the markets want to take on risk. And that means that speculative trades such as betting on oil prices going up further will be in vogue.

All of this points to CAD getting stronger in the near term.

Investors can buy CAD via ETF or via options in the U.S. financial markets.

This blue-light special on CAD will only be available for a very short time.

This deal is for the quick trader and the quick footed.

I just started a new position in this trade and hope you will do the same too.

Obviously this is a speculative trade and I would advise caution if you jump into this trade.

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Wednesday, 29 February 2012 09:28 AM
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