Tags: canadian | dollar

The Tide is Turning for the Loonie

By    |   Thursday, 04 Dec 2008 11:26 AM

For the last several months, it seems the Canadian dollar hasn't been able to catch a break. In fact, the loonie has had six back-to-back monthly drops.

In previous years, the loonie was stronger than the U.S. dollar. Yet, the last few months have been horrendous for the Canadian currency.

Six straight months of decline for the Canadian dollar is very rare and I suspect a bit overdone. Canada’s currency hasn’t had this quick and severe of a drop since 15 years ago.

The global slowdown, the 62 percent drop in crude oil, and the U.S. recession have all taken its toll on the loonie.

However, the fall of crude from its high of over $147 a barrel to a recent low of $48 barrel may be slowly coming to an end. The OPEC nations have a lot of incentive to get the price of oil headed back upward.

Many of the OPEC countries' budgets have been figured off of $75 to $100 oil for starters. Even Canada needs higher-priced.

If the price of oil doesn’t start edging higher on its own, you can expect OPEC to cut oil production by at least another 1 million barrels a day when it meets on Dec. 17.

OPEC countries are very concerned about the severe drop in the price of oil. They remember when, just 10 years ago, prices dropped to as low as $10 a barrel. During that time, Russia, Norway, and Mexico joined with OPEC to drive the prices back higher. Their efforts were obviously effective. Don't think they won't do it again.

This time, though, they are trying to perform a balancing act — they need higher prices, but at a time when there's a global slowdown, they don’t want to look like greedy countries that will hike the price at the world’s expense either. If the price of oil rises too fast, the oil-producing countries may be blamed for a prolonged downturn.

The United States, Europe, and Japan haven’t been in a simultaneous recession since World War II. In fact, there hasn’t even been an annual decline in the demand for crude oil since 1983. This makes for a very touchy situation.

But it shouldn’t be long now before the United States, Canada’s biggest customer, pulls out of its recession. After all, it went into the recession first and it will likely come out of it first.

The United States is still the largest consumer of oil. So when you get the United States headed back on path, you will find that oil will stabilize and start to head higher.

Traders always get too greedy on the upside and wind up pushing stocks, commodities and currencies too high. Then they turn around and then take things way too low as they get way too fearful. Both are emotional reactions and have nothing to do with logic. Eventually, the market realizes it and puts prices back to more of a fair value.

I believe that stocks, especially in the U.S., are in a process of stabilizing right now. When that happens, it will cause money to leave the defensive plays of bonds, the U.S. dollar and the yen and go into other currencies and back into stocks.

When this happens, and I believe the ship is beginning to turn even now, the Canadian dollar will rise against the U.S. dollar and yen. Thus it will bring down the USD/CAD pair and bring up the CAD/JPY pair on CAD strength.

I think the worst is behind these two currency pairs and that a person taking a longer-term view (months to a year) will come out very well betting for the loonie now and not against it.

It’s hard for many traders to see a turn coming, and they often get caught on the wrong side of the market. They can usually see what’s currently happening but rarely what’s coming and why a change is in order. But, you don’t have to be in that position.

Start looking for the tide to turn in the Canadian dollar. Look for the USD/CAD to head lower overall and for the CAD/JPY pair to head higher over the coming months to year.

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SeanHyman
For the last several months, it seems the Canadian dollar hasn't been able to catch a break. In fact, the loonie has had six back-to-back monthly drops. In previous years, the loonie was stronger than the U.S. dollar. Yet, the last few months have been horrendous for the...
canadian,dollar
697
2008-26-04
Thursday, 04 Dec 2008 11:26 AM
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