commodity currencies

Bank Of Canada Remains Hawkish

Forex Kong 5 Comments

We’ve briefly touched on a few of the “animal characters” you will encounter during your trading career. Bears, bulls, gorillas, snakes and wolves. Here’s a bit on Hawks.

Hawks carefully monitor and control economic inflation through interest-rate adjustments and monetary-policy controls. In general, hawkish investors prefer higher interest rates in order to maintain reduced inflation.

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

The global economy has unfolded broadly as the Bank projected in its October Monetary Policy Report (MPR). The economic expansion in the United States is progressing at a gradual pace and is being held back by uncertainty related to the fiscal cliff. Europe remains in recession. Chinese growth appears to be stabilizing. Commodity prices have remained at elevated levels since the October MPR and global inflationary pressures are subdued in response to persistent excess capacity. Global financial conditions remain stimulative, though vulnerable to major shocks from the U.S. or Europe.

In Canada, economic activity in the third quarter was weak, owing in part to transitory disruptions in the energy sector. Although underlying momentum appears slightly softer than previously anticipated, the pace of economic growth is expected to pick up through 2013. The expansion is expected to be driven mainly by growth in consumption and business investment, reflecting very stimulative domestic financial conditions.

This should bode well for long Canadian Dollar trades moving forward as a rise in interest rates is generally seen as good for the currency.

 

USD/CAD – Currency Move Expected

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The U.S Dollar and the Canadian Loonie  have been dancing close to parity for quite sometime now. Looking back over the last 2 full months the pair has been ranging within 150 pips or so – and has been a real pain to trade. For the most part this pair “should” be relatively easy to figure out, as the two currencies are generally viewed as opposite in most traders eyes. The U.S Dollar representing a safe haven currency while the Loonie is more often seen as risk related and “commodity related”. As per my general guidelines one would look to buy U.S.D and sell CAD in times when risk is off, and opposing – sell U.S.D and buy CAD in times when risk is on. Interestingly my risk barometer (the SP 500) has taken quite a dip during the same time frame – but has ultimately bounced back to almost exactly the same level as the beginning of October.

So there you have it. Little change in global risk appetite over the past few months.Little change in the difference in value of the U.S Dollar and the Canadian Loonie. Not to mention that often currencies of similar geographic region do tend to “range” more so than they “trend” and are often difficult pairs to trade. Take for example AUD/NZD or EUR/GBP – two other geocentric pairs that I rarely choose to trade.

I do expect a move in USD/CAD is coming very soon, and firmly believe that come December – Fed policy should start to weigh heavy on the U.S Dollar, coupled with accelerated global appetite for risk compounding buying interest in the commodity currencies. These two factors in combination (not to mention the strong economic numbers that we continue to see out of Canada) should bode well for the Loonie likely headed for 1.05 – 1.06 in relatively short order.

A Traders Edge – Look To The Bigger Picture

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This came up in the comments area and I wanted to post this for everyone – as I believe  it to be an important point.

I see “risk on” for commodities from a couple different angles – and yes…..at times it is difficult (especially these days) to discern which direction things are headed with so much information, and so much of it conflicting.

  • From a purely fundamental view – world populations are growing, and resources are diminishing (things we all need/use are getting harder to find) = commodities up
  • The simple fact that as the world’s current reserve currency (the U.S dollar) is firmly being targeted for devaluation, the cost of these “things we need” should rise – as they are priced in U.S dollars. Dollar worth less = commodities up
  • From a currency point of view – long term trends in AUD and NZD (like..a weekly chart at least) are clearly in very well defined up trends despite recent volatility and the daily action. Commod currencies up = commodities up

Zooming out to a larger picture often helps frame shorter term trade decisions (or at least provides a solid background) when the day to day volatility gets difficult to handle. The “edge” can be found here – in having the confidence in your decisions, knowing you are trading in the right direction from a larger point of view – and not letting the “daily squiggles” bump you out of your trade.

A quick chart of the  “$CRB Commodities Index”  and the likely direction of “all things commodity” coming soon to a theatre near you.

The Commodities Index - $CRB

Commodities set to move higher

Open your Eyes – Take Comfort In Commodities

Forex Kong 8 Comments

If you only follow one asset class…ie…gold or bonds…or stocks via the SP 500 or Dow – you really need to consider opening your eyes a little wider to get a true understanding of where things are going. The financial blogoshpere is ablaze this morning with freaked out investors and traders –  crying the blues that gold has “fallen off a cliff”  and that the dollar is headed for the moon. This couldn’t be further from the truth.

Indeed gold has taken a dip ( and for many…30 bucks may seem more like a crater) but looking at a daily chart, and drawing a simple trendline – one finds that this is as normal a pullback as any, and that the up trend in gold is very much intact.

Currency wise – the commodity related currencies  (or CommDolls..including AUD, NZD and CAD) are more than holding their own, and continue to gain ground against the dollar – as oil likely finds support here as well. The only “real loser” here today is the EURO – and even at that, is no lower vs the dollar than it was  a month ago.

Looking at the larger picture across several asset classes, this looks like a buying opportunity to me, and as much as I understand how difficult it may be – you really do need to open your eyes ( and possibly hold your nose) “buy the blood” and take comfort in commodities.