What’s Driving the Canadian Dollar
Wednesday, April 18th, 2007
By George Leong, B.Comm. for Profit Confidential
Driven by strong commodity prices, Canada saw its currency on a nice upward trend after trading at US$0.62 in January 2002 to break above US$0.90, a level unseen in over a decade. But the CAD subsequently got caught in a downward slide that drove the price down to below US$0.85 in early February 2007, in line with the decline in oil prices to below $55 per barrel.
The slide in the CAD was not a surprise, given that the CAD is also often known as a “Petro currency.” The CAD is also driven by the direction of other commodities, such as gold, silver, copper, nickel and uranium, all of which have been strong. We view the CAD as a commodities dollar that allows traders to benefit from commodity strength.
You do not have to invest directly in the CAD to benefit from its strength. You can benefit from a strong Canadian economy and CAD by investing in large multinational companies that have a strong presence in Canada. Companies include Proctor & Gamble Co. (NYSE/PG), Wal-Mart Stores Inc. (NYSE/WMT) and Dell Inc. (NASDAQ/DELL) to name a few. Alternatively, you can also buy blue-chip Canadian stocks or Canadian index funds that are denominated in the CAD. This allows for currency diversification in your portfolio.
The CAD has been trending higher since early February and appears set to take a run at US$0.89. The CAD is sitting at a crux and may face some selling pressure in the near term as it tries to mount a sustained move at $0.90.
The technical picture is bullish, but the CAD is overbought, so we could see some near-term selling pressure as the CAD tries to edge higher.
My feeling is the CAD will continue to trade off the strength of commodities, especially oil prices and metals. There is resistance at $0.8854, $0.8922, and $0.9016. The contract 52-week high is at $0.9209.
But should one or more of the key commodities soften, I expect the CAD to pause and see some downside pressure to the 20-day moving average at $0.8682.
Overall, I like the CAD, but I doubt very much it can ever trade higher than the USD, something that happened in the mid-to-late 70s.
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Tags: gold, U.S. dollar
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George is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. His trading advice on stocks and options is also found on his daily trading site, Daily Profits. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services.



