By: William Doody
The Canadian Dollar has been under increasing pressure in recent weeks as fears of a failed economic recovery have pushed currency traders away from commodity currencies and towards safe-havens such as the U.S. Dollar and Japanese Yen. The sharp decline in oil prices over the last week has only exacerbated the decline in the Canadian Dollar. Even though Canada’s domestic economy has remained relatively stable – for example, Canadian banks have avoided much of the subprime mess – the country’s currency still suffers when traders fear that the global economy will weaken. Data in recent weeks which has showed increasing unemployment in the U.S., poor consumer confidence and lackluster consumer spending around the globe, and weak manufacturing in the U.K. all point to the possibility of a “double-dip” during the second half of the year. Such a scenario would be especially damaging to commodity-based economies such as Canada’s. Since these economies are primarily dependent on commodity exports, a further economic decline would send major shockwaves through their already weakened economies. Thus currency traders have been selling the Canadian Dollar in expectation of ongoing weakness. Similarly, commodity prices can be expected to decline further if the pace of global recovery seems to have slowed or even stalled. This will further depress the value of currencies such as the Canadian Dollar.
Despite all of the negativity outlined above, we would consider opening a small long position in the Canadian Dollar this week. Commodity prices, in particular crude oil, most likely do not have much further to drop. Stabilized commodity prices should create a floor to support the Canadian Dollar. Meanwhile, we expect risk appetite to strengthen as we move through Q2 earnings reports and (hopefully) see signs of economic stabilization. While the Australian Dollar trade is more appealing because of its higher yield, we like the relative security of the Canadian economy in this uncertain environment.