3 Things to Look out for the Loonie

Boy, oh, boy! Have you seen that range on the Loonie? It seems like traders just don’t know what to do with it!

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Here are three things that could give you an idea where it’s headed:

1. GDP and Inflation
So far in 2010, Canada has been posting some remarkable numbers. However, it appears that their economy is now hitting some speeds bumps. Yesterday, the monthly GDP report revealed a decline of 0.1%. This marked the first month-on-month decrease in 11 months. Tsk tsk. Meanwhile, recent CPI reports indicate that inflation is slowing down. After posting a 1.7% figure in June, inflation has ticked down to 1.6% over the past two months.

Why is this significant? Well, it might just give for Bank of Canada Governor Mark Carney some reason to stop, think, have a cigarette, and decide whether the central bank should continue to raise rates or not. Remember, the BOC recently raised rates to 1.0% this past September because the Canadian economy had been showing signs of good improvement. However, the recent GDP and inflation figures hint at possible weakness entering the winter season.

If the BOC were to pause on future rate hikes, it might dampen sentiment towards the Loonie, as rising interest rates are normally bullish for the local currency, while falling (or steady rates in this instance) would be bearish.

2. Oil Prices and Trade
The Loonie has been flexing its muscles against the dollar lately, largely for two mains reasons. The first, as I mentioned earlier, is the relatively stronger performance of the Canadian economy this 2010. The second, a certain performance enhancer that we like to call “black crack”.

I’m talking about oil baby! Because Canada is one of the largest oil producers in the world, it has benefitted from the nice bullish run of commodity prices, oil in particular.

Still, judging by some recent reports, I can’t help but wonder that the strong Loonie might be having an adverse effect on Canada’s trade figures. The weakening demand from the U.S., Canada’s biggest trading partner, widened Canada’s trade deficit from 1.81 billion CAD in June to 2.74 billion CAD in July. Whoa, that’s the widest since 1971 when Clint Eastwood was struttin’ his stuff in Dirty Harry! Is the Canadian dollar becoming too expensive for importers?

If the Canadian dollar continues to rise across the charts, it could hinder Canada’s export industries. In the past, we did hear BOC officials mention that the Loonie was too strong. If we see exports continue to struggle, it may give the BOC another reason to keep rates at low levels.

3. International Scene
You should also pay attention to what is happening stateside! One hot topic in the forex scene nowadays is prospect of another round of quantitative easing from the U.S. Federal Reserve.

Quantitative easing (QE) is a form of monetary policy used by the Fed to increase the supply of money in the economy. It does this by essentially “printing money”, then using this money to purchase financial assets such as government and corporate bonds from other financial institutions. This increases money supply, which should – in theory at least – make it easier for businesses to secure capital, thereby stimulating the economic activity.

QE is a very risky move, as it could trigger hyperinflation if too much money is flooded into the economy. The fear of hyperinflation is causing investors and traders alike to shy away from the Greenback and put their money in other hotter currencies like the Loonie.

Only time will tell where the Loonie is headed. With all the craziness in forex market, who knows what’s gonna happen next! What do you guys think?