Tags: canadian | dollar

Stronger Canadian Dollar Coming With U.S. Recovery

Monday, 03 Aug 2009 03:36 PM

By Sean Hyman

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It’s no secret that the big banks call the retail speculator the “dumb money” because they try to buck a trend rather than go with it.

A trend in motion is likely to stay in motion. I’m referring to the USD/CAD currency pair. Dollar weakness and recent Canadian dollar strength has pushed this pair down. It’s been in a downtrend for months now.

Yet the retail speculator says, “It’s gone down too far and it must turn upward from here!”

However, this my friend, is what Wall Street calls “trying to catch a falling knife.”

Pros aren’t dumb enough to do it but retail money tries it every day of the week.

Why is the Canadian dollar strength bound to continue? This past week, there was a stark improvement in the U.S. GDP number (down 1.0 percent vs. down 6.4 percent in the previous quarter). This means that the economic slowdown improved materially.

This data lags, too. So traders are thinking that we could have broken back into positive GDP growth.

They will have even more reason to think that if they listened to former Federal Reserve Chairman Alan Greenspan’s interview on ABC this past Sunday. He was quoted as saying that we may have actually “turned up in the middle of July.”

This huge turn around in the U.S. economy means that growth and expansion will return. As it does, it will require an increase in transportation and fuel in order to expand this growth phase.

That’s the underlying thought behind the boost to the Canadian dollar lately. Canada’s biggest trading partner is the United States and the number one export that the United States gets from Canada is oil.

Therefore, if the United States is recovering and is about to expand again, then it will need more fuel and energy to do this. Canada has what the United States will need and therefore, the Canadian dollar (CAD) gets a boost on that thought.

Also, last week’s crude oil inventory numbers were very high (5.1 million barrels). A positive number shows an increase in inventories and should sink the price of oil for the moment. Instead, the price of oil ran up from the $62 area up to almost $70 to end the week! Again, that’s bullish for the Canadian dollar.

So these fundamental forces that are improving are a breath of fresh air to Canada and they’re bad news for the U.S. dollar because investors will flee the fundamentally flawed currency as they seek out greener fundamental pastures around the world, Canada being one of those countries.

Therefore, this will continue to push the USD/CAD pair southward over the coming months.

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