There are two major factors continuing to create headwinds for the Canadian dollar, which will continue to have a favorable impact on basis levels for some Canadian grains.
The first is the price of crude oil which is in a short-term downtrend and is dragging the Canadian dollar lower. Today's crude oil December low of $41.54/barrel is the lowest level reached since Aug. 27 on the continuous chart, after having reached a short-term high on Oct. 9 of $50.92/barrel. Today's move exhibited technical weakness, given a move below support from both the 61.8% and 67% retracement of the move from the August low to the October high, with the December contract falling in six of the past seven sessions. Weekly momentum indicators are rolling over and suggest that a further move to the downside is possible.
The December Canadian dollar (electronic) traded below $.75 CAD/USD for the first time since Sept. 30 prior to a late session recovery which pared today's losses. While the overall direction of the market has been sideways over the past five days, continued weakness in crude oil could weigh further on Canada's currency trade which could lead to a test of the Sept. 29 low of $.7428 CAD/USD. ProphetX calculates the correlation between the two markets at close to 78%.
The other major factor weighing on the Canadian dollar is the potential widening of interest rate spreads between the United States and Canada, with financial analysts pointing to a near 70% chance that the U.S. Federal Reserve will increase rates in December, according to market signals. Regardless of when this takes place, the expected response by the Bank of Canada is to do nothing, which will result in upward movement in the U.S. dollar against foreign currencies, including Canada's dollar.
A quick look at cash basis levels for Ontario corn shows Thursday's elevator bids largely 80 to 90 cents over the December future, keeping producer prices in the $4.50/bu area. DTN's National Average Basis was reported at 23 cents under the December on Tuesday for U.S. corn, which would represent a cash bid of $3.39/bu USD given Thursday's close.
Thursday's Ontario soybean basis ranged largely from $2.20 to $2.25/bu over the January contract, with elevator bids ranging largely from $10.83 to $10.88/bu. This can be compared to DTN's Wednesday National Average Basis of 46 cents under the January, which would leave DTN's National Soybean Index at roughly $8.17/bu USD given Thursday's close.
As well, the average prairie CWRS basis was calculated at $1.19/bu over the December MGEX spring wheat contract, suggesting an average bid of $6.24/bu. Wednesday's National Average Spring Wheat Basis in the U.S. was reported at 21 cents under the December, which would result in a bid of $4.84/bu given Thursday's close.
A move below the September low of $.7428 CAD/USD could lead to further downside, with the long-term continuous monthly chart showing potential support at $.7135 CAD/USD from May 2004, then again at $.7030 CAD/USD, the July 2003 monthly low.
Cliff Jamieson can be reached at email@example.com
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