The Bank of Canada (BoC) released minutes of the recent rate meeting
that showed the central bank are looking for a reversal in the 1.0400
value of the Usd/Cad currency pair. The concern of the Monetary Policy
members is in the fact that the increase in value of the Canadian
dollar is speculatively based by investors seeking higher yields in
Canadian markets than in the U.S.
A stronger Canadian dollar
that bases appreciation in commodity market growth is something that
the bank can more easily tolerate as it leads to export strength as
well. A move higher on C$ that is based on Usd weakness globally
creates an imbalance in currency valuations.
Commodity/Speculative Growth
Without natural
commodity demand to offset rising currency values the central bank is
left to try to intervene somehow in the flow of momentum that looks to
challenge parity. That challenge is made harder by the fact that
economic growth is not at a level that the BoC would be willing to
rapidly print new C$ notes and bills, nor would it be an easy job to
chose to use existing reserves to achieve that goal of a weaker C$.
If left unchallenged the stronger currency will increase the cost of
natural resource exports, as well as making Canadian manufactured goods
less competitive, as well as reducing top-line profits from those
companies in Canada that sell goods in Usd's.
Technical View
Usd/Cad 4 Hour Chart
On the Usd/Cad pair a truncated wave V may still be the case as the
market is trading well above the 1.0264 critical support zone. So long
as this support holds, traders may be looking for a move up, near to
the upper resistance line, especially if the 1.0581 top is taken out.
Any
break of the 1.0264 support will suggest that bottom is not in place
yet, and a move down to the 1.0000 area is still one of the possible
scenarios. In this case, the A-B-C correction will be the correct count.
Commercial Impact
The real impact on commercial
business may not yet be in the market, as the lag effect that comes
from foreign exchange impacts on balance sheets has only just absorbed
the credit-crisis moves lower in C$.
As the depth of the credit crisis was revealed there was a move to
the greenback that sent C$ values initially lower, as the markets made
an initial move to the safety of the Usd. The reversal to Usd weakness
as global markets stepped in to buy all assets classes has yet to be
fully felt on commercial balance sheets, and that is something that the
BoC will be very aware of as parity comes into site on the dollar pair.
Inflation Impact
"While higher commodity prices
have been supportive, movements in the Canadian dollar over the period
appear to have been increasingly driven by a broader depreciation of
the U.S. dollar against most major currencies," the Bank of Canada's
October Monetary Policy Report stated.
"A stronger-than-assumed Canadian dollar, driven by global
portfolio movements out of U.S.-dollar assets, could act as a
significant further drag on growth and put additional downward pressure
on inflation," the report went on to say.
The distinction between
natural growth and overall Usd weakness is now bought to the fore, and
is something that traders will look to for signs of increased orders
flows at current support and resistance price points.
Global Call
The Bank of Canada joins a list of
central banks looking for a reduction in Usd values, with the call
going straight into the U.S. Administration to stand firmly behind the
publicly spouted Strong-Dollar policy.
Japan, Euro-zone, Australia, Canada, Russia, Brazil, China, have all
recently called for Usd support from the U.S., which is something that
may create a feeling of discomfort as the twin deficits of Trade and
Current accounts look so much more appealing with a weak dollar.
Cad
traders will be looking for 4 hour chart breaks of 1.0390 support, or
1.0590 resistance, as a sign that the wish-list from the Bank of Canada
for a stronger Usd is following through, or not, as the case may be.
