Canada Markets

The Canadian Dollar Pushes Lower as Bank of Canada Changes Stance

By Cliff Jamieson , Canadian Grains Analyst
Today's sharp move lower in the Canadian dollar in response to today's Bank of Canada address saw the currency's exchange rate with the United States dollar move back into its downward sloping channel that began with the high during the week of Jan. 7 of this year. As seen here on the December Canadian dollar weekly chart, current trade is at the support of the 50% retracement of the rally from the August low of $.9437 CAD/USD to the September high of $.9799 CAD/USD. (DTN graphic by Nick Scalise)

Since the April 2012 meeting of the Bank of Canada, warnings have been issued that the next move in interest rates would be higher, while both the Bank of Canada and the Federal Department of Finance have repeatedly cautioned consumers to mind their personal debt levels as the cost of borrowing will inevitably be higher at some point.

In a world where every word released by the Central Banking authorities around the world is scrutinized for meaning, it did not take long after today's public address for markets to react to the fact that the inference of future higher rates was removed entirely from the Bank of Canada's speech today. The monthly overnight rate was left unchanged at 1%, and was no surprise. What is a surprise is the omission of the discussion surrounding higher rates. This is viewed to potentially open the door for even lower rates down the road.

This was viewed negatively by the currency markets and the Canadian dollar was sold. Two other influences in today's Canadian dollar trade are the Bank of Canada trimmed its GDP forecasts for 2013, 2014 and 2015, as well as the sharp sudden sell-off in the crude oil futures. Canadian economic growth is expected to achieve only 1.6% in 2013, 2.3% in 2014 and 2.6% in 2015. Crude oil has shed approximately $4/barrel this week, with most recent trade just above $97/barrel. The loonie's reputation as a petro-currency will be tested given this move.

The daily chart for the December Canadian dollar (not shown) indicates a test of the contract's 200-day moving average in three of the last four sessions, although trade was not able to overcome this resistance level, found at $.9711 CAD/USD. At the time this chart was produced, the Canadian dollar was searching for support from its 100-day moving average as well as the 50% retracement of the rally from Aug. 23 to Sept. 19 at $.9618.

As seen on the attached weekly chart, trade is now back within its downward-sloping price channel which has largely limited trade since the week of Jan. 7 this year. A move below $.9618 may lead to a further test of the 61.8% retracement level at $.9575, with little potential support between this level and the August low of $.9437. The lower study also reveals that upward momentum has waned as the blue line has crossed over the red line and it appears that these indicators will continue to roll over leading to downward momentum.

A recent study released by London-based World Economics, as reported in the Calgary Herald, suggests the true value of the Canadian dollar is $.88/USD, while the Bank of Montreal stands by its estimate of true value being at $.90/USD.

A move toward what's viewed as true value by either of these economists would be most welcome by Canadian producers as they seek opportunities to push this monster crop into global channels.

The Canadian dollar closed at $.9609 CAD/USD, down 98 basis points.

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

(ES)

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