Canada Markets

A weak jobs report in Canada along with a retracement in the crude oil market to a near-test of January lows led to Canadian dollar weakness Friday, with the June dollar down close to one-half cent Friday while down over 100 basis points over the course of the week.

"It all has to do with the strength of the U.S. economy and vulnerabilities of just about everyone else," Bank of Nova Scotia Currency Strategist Camilla Sutton told the Globe and Mail. The situation may get even fuzzier with increased talk of a possible interest rate hike in the United States as early as June, while the odds are suggested to be 50-50 that the Bank of Canada will add a further cut to Canada's overnight lending rate. On Thursday, Bank of Canada economist Rhys Mendes told the House of Commons finance committee that a rate hike in the U.S. may not be followed in Canada, but rather domestic inflation will be the sole driver of any changes made to Canadian monetary policy.

While the crude oil market faced its fourth consecutive weekly loss, commodities in general are taking a beating. The Bloomberg Commodity Index, an index comprised of 22 exchange traded futures on 20 different commodities hit its lowest level since August 2002 in Friday morning trade, as the U.S. dollar rally pushes U.S. dollar-denominated commodities lower. At the same time, weakening currencies elsewhere are impacting overall demand levels for commodities.

The attached graphic shows the June Canadian dollar weekly, with this week's weakness resulting in a move below the January low of $0.7802 CAD/USD to reach a fresh low of $0.7787 CAD/USD before moving back to the January low. This represents the lowest level traded since March 2009, a six-year low.

The middle study is a histogram of the net position held by noncommercial traders, or investors. While the chart shows a net-short of 38,863 contracts as of March 3, updated data shows this net short growing slightly to 39,030 contracts as of March 10, which represents the largest net short position or most bearish position held since the week of March 18, 2014.

The lower study indicates the stochastic momentum indicators are deeply oversold, leaving the exchange rate vulnerable to a sudden change in direction, although this has been largely oversold since last September.

The long-term monthly continuous chart (not shown) would indicate that a further move lower could result in a test of support from monthly lows in the October 2008 to March 2009 period ranging from $0.7653 CAD/USD to $0.7692 CAD/USD level, although there's forecasts for 2015 that would suggest a low of $0.71 CAD/USD, a level not seen since fall of 2003.

DTN 360 Poll -- Will further Canadian dollar weakness benefit or hinder your operation? Is there an optimal exchange rate for your operation? You can weigh in on this week's 360 Poll found on your DTN Home Page. Thanks for your support!

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

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