Canada Markets

The Canadian dollar fell just short of reaching a one-month high in today's trade while breaking through the resistance of its intermediate downtrend which began Sept. 14 at $1.0359 CAD/US dollar. This breach of resistance took place on Decd 4, on the release of the Bank of Canada's monthly monetary policy update. Today's trade saw support from the December contract's 100-day moving average at $1.0070 (black line) which continues to trend higher on the daily chart.

As seen on the attached chart, since hitting a Nov. 16 low of $.9936, the Canadian dollar has rallied to test the 38.2% retracement of the recent downtrend at $1.0098 in today's trade, while failing to hold above this level. Should the dollar breach this level, the 50% level of $1.0148 CAD/US dollar may be tested.

Prior to today's trade, the loonie has traded over a tight, 56-basis point range for almost two weeks. This range-bound trade has been common across many currencies as of late, leading the dollar speculators frustrated with the lack of short-term activity in the market. The volatility of Canadian dollar futures is also suggested to be at 10-year lows, indicating there is less uncertainty or risk associated with market moves. While the markets seem to be concerned with the daily fiscal cliff negotiations in the U.S., volatility data is not reflecting concern at present.

A recent economic report from Scotiabank does not paint an optimistic picture for Canadian dollar moves from the perspective of a Canadian exporter. Their current forecast is for an upward trend for the CAD/US exchange, with the rate to end 2012 at $1.03 CAD/US dollar, with 2013 to end at $1.04 CAD/US and 2014 to end the year at $1.06 CAD/US. While this trend will help ease U.S. dollar related costs over time, such as U.S.-made equipment and fertilizer, it makes Canadian exports less competitive in global markets.

The rationale for their forecasts is based on:

-- differences in monetary policy between Canada and other nations. For example, the measures taken by the U.S. to stimulate their economy are forecast to erode the value of the U.S. dollar against other currencies, including the Canadian dollar.

-- the Bank of Canada's ongoing suggestion that interest rates will rise continue to support the Canadian dollar, while any eventual increase in rates will push it even higher. Just today, the Bank of Canada released a report which, for the first time, adds Canada's low-interest rate policy to the list of risks which are impacting the economy of Canada, with a similar situation impacting many other nations. Governor Mark Carney, who recently announced his upcoming departure to head the Bank of England, is suggesting that low interest rates are increasing the risk for what they call long-duration liabilities, such as pension funds and insurance companies, while they are also encouraging increased risk-taking as investors seek higher returns, which can potentially create upward pressure on global asset prices.

While higher rates have long been on the Bank of Canada's radar, they are also a double-edged sword, as they can threaten the recovery of our already sluggish economy.

Cliff Jamieson can be reached at cliff.jamieson@telventdtn.com

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