Canada Markets

Firming Canadian Dollar Weakens Basis

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
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The Canadian dollar increased 7.7% from its Jan. 20 low to its Feb. 4 high, while the move Wednesday nears a further test of the Feb. 4 high. Trade remains largely within a 2-cent range. The most recent CFTC data shows non-commercial traders holding a net-short futures position of 51,935 contracts (lower study), an eight-week low. (DTN graphic by Nick Scalise)

A random Twitter communication today pointed out the cost of waiting on the Canadian dollar to fulfill some of the more bearish forecasts that have been released in recent months. Indeed, as the Canadian dollar reached its low of $.6809 CAD/USD in late January, some economists were releasing forecasts suggesting the loonie could reach as low as $.59 CAD/USD.

As seen on the attached chart, the Canadian dollar gained 7.7% between Jan. 20 and Feb. 4, while today's high of $.7316 CAD/USD is approaching a test of the Feb. 4 high with developments in the crude oil market seen as supportive for Canada's currency. Since early February, Canada's dollar has traded in a 2-cent range, with the lower-end of the range representing the 38.2% retracement of the move from the Jan. 20 low to the Feb. 4 high at $.7131 CAD/USD.

The cost to producers in terms of weakening basis over this period is significant. The average prairie CWRS basis was reported at a high of $1.46/bu over the nearby future on January 18 while has since narrowed to $1.10/bu over in today's trade. Another example is seen in Ontario soybeans, which reached a basis of $3.25/bu over the nearby future in the week ending Jan. 15, while today's activity is suggesting a range of largely $2.80 to $2.90/bu over.

Where we go from here could be tied to the success (or lack of) in efforts tied to limiting global crude production, with waning global demand growth an added complication.

A move above the $.7331 Feb. 4 high could lead to a further move to a test of weekly highs from November/December ranging from $.7476 to $.7558. The move could be supported by non-commercial short-covering, given substantial net-short position held.

Another risk may lie with seasonal trends for both crude oil and the Canadian dollar. DTN strategies point to the Five-Year Seasonal Trend for oil which typically moves higher into April, a notion supported by Thackray's 2016 Investor's Guide, which suggests that Feb. 25-through-May 9 as a period of seasonal strength for crude. As well, April is viewed as the strongest month for the Canadian dollar, highly correlated to the seasonal strength seen in crude.


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