Canada vs. Europe

In recent weeks we have recommended long Canadian dollar positions against the US dollar and the Mexican peso. Over the past month, the Canadian dollar has been among the best performing currencies, gaining 8.6% against the dollar and more than 7.5% against the Mexican peso. We are concerned that from a fundamental perspective, much of the good news for Canada has been discounted--such as higher commodity prices and the recovery in the auto sector. The persistent strength of the Canadian dollar risks some condemnation by Canadian officials who are worried that it may hamper the recovery. At the same time the technical indicators are stretched for the Canadian dollar, suggesting that the risk is for a deeper correction.That said, sentiment toward the US dollar is poor and we are wary of Mexico's fundamental backdrop, especially with the peso trading on the strong side of its range. Therefore, for those who share of concerns about the Canadian dollar, consider selling the Canadian dollar against the euro or sterling.

Since July 9th the euro has slumped more than 7% against the Canadian dollar and appears to have begun carving out a bottom in the second half of last week. It is currently trading near CAD1.54 having briefly dipped below CAD1.52 on July 30. A move above CAD1.5450-60 area would target CAD1.5625 and possibly CAD1.5750. For a particularly tight stop, consider CAD1.5320, which if the euro broke would call into question whether CAD.15200 is really the bottom.

For its part, sterling peaked against the Canadian dollar a little before the euro and proceeded to depreciate by nearly 8.25% against the Loonie since June 30th. After hitting a low on July 24th, sterling has done more work carving out a bottom. The low was near CAD1.7735 and today it is flirting with CAD1.81. There is near term potential toward CAD1.85 and then CAD1.87. A tight stop could probably be set just below CAD1.80.
Canada vs. Europe Canada vs. Europe Reviewed by magonomics on August 04, 2009 Rating: 5
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