Canadian Currency Outlook

The Canadian dollar is known, along with the Australian dollar, as one of the “commodity currencies.” It tends to appreciate relative to other global currencies during periods of stronger economic growth, particularly when energy and metals prices are rising. So it’s no surprise the Canadian has collapsed over the past 18 months given the weak global economy and declining energy and metals prices.

The question going forward: Is the worst behind us in terms of economic growth, energy and metals prices? If the answer’s yes, then the worst is also behind Canadian dollar values, which should start to appreciate, not only against the US Dollar, but also versus the European currencies.

Common wisdom would say yes, the worst is over. The reason has to do with money creation worldwide. Just today, the Group of 20 nations agreed to provide $1 trillion in resources to the IMF for needy nations. Perhaps the most inflationary development (longer term) is the US Federal Reserve’s new policy of “quantitative easing.”

“Quantitative easing” is just another term for freshly printing cash. In reality the cash isn’t printed–it’s electronically created–but the point is these funds represent new money into the system. Due to the fractional reserve system a trillion in new money can turn into $10 trillion of new money in the system.

So what does this have to do with the Canadian dollar?

There has never been a case of successful quantitative easing in economic history. It has always–repeat: always–led to higher inflation sometime in the future. The only question is when it will start and how bad it will get. Higher inflation is bullish for commodities and therefore bullish for the Canadian dollar.

Longer term the Canadian dollar should appreciate, perhaps dramatically. The question is the timing, and for that we turn to the charts.

Weekly Canadian Dollar

Source: Commodity.com

Since trading at its all-time high of USD1.10 (one Canadian dollar got you 1.10 in US dollars; now it only gets you USD0.81) in November 2007, the loonie has continually registered a pattern of lower highs, as tracked by the series of Xs on the chart above. This is a bearish pattern, a classic downtrend, and until a new higher high is registered, the trend remains down for the Canadian dollar. There’s no reason to rush in.

This pattern will change with a move above 82.50 on the weekly chart, the first higher high. It would then be confirmed with an eventual move above 85 even, a second higher high. What we’re ultimately looking for is a stair-step pattern of higher lows and higher highs, the reverse of the above chart. Once this pattern is confirmed on the weekly chart, we can be confident our longer-term analysis is correct.

Good luck and good trading.

George Kleinman is editor of Futures Market Forecaster, an exclusive futures trading advisory that seeks to profit from the fast-moving commodities markets.

George is a graduate of The Ohio State University and has an MBA from Hofstra University. George entered the business with Merrill Lynch Commodities in 1978 and in five years entered the “Golden Circle” as one of firm’s top 10 commodity brokers internationally. He has been highlighted in national publications such as Fortune.

George is the founder and president of Commodity Resource Corp, a futures advisory and trading firm established in 1983 that assists individual speculative traders as well as institutional and corporate hedgers. He has been trading full time since 1977, an Exchange member for over 25 years and is the author of four seminal books on commodity futures trading, including The New Commodity Trading Guide, published in April 2009.

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