If you’re one of them currency bulls who had bought the Canadian dollar at the start of August, then you better give yo’ self a pat on the back! Thanks to higher oil prices, risk appetite, and hawkish speeches by the BOC blokes, the Loonie is the strongest major comdoll against the Greenback so far this month.
But before you buy the Loonie like it’s the latest Skrillex album, here are three possible reasons why the Loonie could weaken over the next couple of days.
1. The oil rally is getting slippery
Oil prices received a nice boost early this month after major central banks like the ECB, Fed, and BOE hinted at possible stimulus in the near future. But with its own growth issues, China is now joining the U.S. and the euro zone in giving sleepless nights to investors, which means it looks like rallies in commodities like oil are about to get slippery.
Aside from printing weaker-than-expected import and exports numbers yesterday, China also clocked in its lowest level of crude oil imports in nine months. Let’s remember that China is the world’s second largest oil consumer, folks! That’s a pretty big deal, and if that wasn’t enough to give oil bulls the heebie-jeebies, the International Energy Agency (IEA) also cut its world oil consumption forecasts from 89.9 million barrels per day (mbpd) to 89.6 mbpd in 2012 and 90.5 mbpd from 90.9 in 2013. Yikes!
What does this have to do with the Loonie, you ask? If you read the School of Pipsology, then you’ll know that Canada is one of the world’s top oil producers. This means that demand for the Loonie tends to rise as oil prices get more expensive.
2. Canada’s strong growth prospects are losing muscle
A few days ago BOC Governor Mark Carney sounded optimistic in an interview with the British Broadcasting Corp. (BBC), saying that Canada is different from crisis countries like the U.K. Heck, he even hinted at a possible interest rate hike in the near future! Well, I guess he hasn’t yet seen Canada’s dovish economic reports, has he?
Canada started the month on the wrong foot when it printed a lower-than-expected GDP reading. It was followed up with better-than-expected building permits and IVEY PMI numbers, but the optimism was soon dented by the release of surprisingly weak housing starts and trade balance data.
Meanwhile, Canada’s employment numbers released just yesterday also showed downside surprises as there was a net job loss of 30,000 and the jobless rate rose from 7.2% to 7.3%. I don’t know about you, but this handsome, not-so-old man thinks that these are enough to make the BOC think twice about a rate hike!
3. USD/CAD is fast approaching a major technical level
If you think that parity is the only major technical level on USD/CAD then you better take a second look at your charts! As our comdoll girl Happy Pip pointed out a couple of times before, USD/CAD reacts pretty strongly to the .9850 handle. In fact, if you zoom out your charts to the daily time frame, you’ll see that the level has served as a strong resistance area around this time last year and was also a strong support in Q1 2012.
Before you sell the Loonie though, take note that we’re trading in an environment where liquidity is low and mere words from major central bankers can have a significant impact on price action.
Who knows? Maybe Bernanke will hint at a QE3 next week, or Draghi could announce his intention to do whatever it takes to support ALL of the high-yielding currencies. The reasons above can serve as your guides in taking your CAD trades, but make sure you also keep an eye out for any game-changers that could influence the Loonie’s price action!