Canada Markets
Will Oil Drag the Canadian Dollar Lower?
The jury may be out on whether Canada's dollar is a petro-currency, although there is a strong case for the impact that commodity values has on the dollar. "We're a commodity currency, so the currency gets crushed" as raw materials drop, suggests Michael Craig, a hedge fund manager in a Bloomberg interview reported in the National Post.
Canada's big banks feel the worst is yet to come for the Canadian dollar, which is also what is being said about oil prices. Yesterday, Goldman Sachs reduced its forecast for West Texas Intermediate oil in the first quarter of 2015 to $75/barrel, down $15 from its previous estimate. The 50% retracement of the move from the December 2008 low on the weekly continuous chart to the May 2011 high is $73.66/barrel, which is in line with this target (not shown on attached chart). Goldman then goes on to suggest the second quarter of 2015 could see prices slip to $70/barrel.
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Prior to this forecast which was released Monday, Canada's two biggest banks, the Toronto Dominion and the Royal Bank, stated the worst is yet to come for the Canadian dollar, as reported in the Financial Post. These two banks are calling for the loonie to reach $.8475 CAD/USD, while the RBC had set this target prior to the weakness seen facing the oil market, which suggests it could be pulled even lower. The CIBC has set a target at $.82 CAD/USD.
The lower study on the attached chart shows the net position in Canadian dollars held by investors or non-commercial traders. After holding a net-long position for 13 weeks from July through late September, they've recently given up hope and have turned bearish once again, with the net-short position growing over the past three weeks to 21,534 contracts.
Cliff Jamieson can be reached at cliff.jamieson@dtn.com
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