What’s Driving the Canadian Dollar

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.

Advertisement

 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.