Canadian dollar

USD/CAD. After nearly taking out highs not seen since 1979, the recent technical breakdown in the Reuters-CRB Futures Index (CRB) spells trouble for “commodity-based” currencies such as the Canadian dollar (CAD), Australian dollar (AUD), and New Zealand dollar (NZD). Industrial production in Japan is decelerating, which is usually bearish for commodity prices. Also, China’s leading economic indicator hasn’t shown signs of rebounding, which could depress commodity prices in the intermediate term.

Falling crude oil prices should depress the Canadian dollar. Speculative positions in oil are very high. A more pronounced setback to the price of oil, which supports Canada’s energy-loaded equity market, is negative for the CAD. The negative correlation between the U.S. dollar/Canadian dollar (USD/CAD) and the CRB Energy Index is quite striking, and provides the foundation for a long USD/CAD position for longer-term traders if the CRB Index remains under pressure.

On the U.S. dollar side, the tug-of-war between the positive cyclical forces and negative structural backdrop for the U.S. dollar continues. Cyclical forces, such as stronger growth in the U.S. and Federal Reserve tightening, will push the dollar higher in the intermediate term, but the technical pattern emerging is complex and will likely continue to frustrate both dollar bears and bulls.

Medium-term players are still holding short positions in the U.S. dollar, which will accelerate an up move in the currency if they are forced to liquidate these trades. Although sentiment toward the dollar has turned up in recent weeks, it has not reached the same level as in previous corrections, which supports a view that medium term traders have not yet capitulated.

AUD/CAD. A bearish position in the Australian dollar/Canadian dollar (AUD/CAD) can be based on several macroeconomic factors. In March, consumer confidence in Australia made its largest ever monthly drop. Consumer spending is also weak. The recent setback to confidence and spending is troubling, given the unemployment rate in Australia is so low (just more than 5 percent) and the Australian stock market has been rising nicely for some time. With this backdrop, a rate hike at the April 28 Australian central bank meeting is not a sure thing.

Conversely, Canada, with its strong economic ties to the U.S., continues to show signs of economic expansion. Canada runs a current account surplus, while Australia has one of the worst current account deficits in the Group of Ten (G10).

New manufacturing orders and unfilled orders have been very strong. Canadian manufacturing shipments are highly correlated with retail sales in the U.S., which are rising at the present time.

The Bank of Canada (BOC) could begin to raise interest rates sooner and at a faster pace than most traders and money managers are expecting. However, the BOC is notoriously difficult to forecast in terms of their monetary policies.

David Dodge, a Governor of the BOC, has said a 200- to 300-point interest rate increase is possible because even at that level the country would still have debt service ratios well below the 20-year national average.

The divergence developing between these two economies/countries is clear. A contraction in their rate differential and weaker commodity prices will impact Australia more than Canada.

Technically, however, traders might need to wait a bit longer before deciding to commit capital. It would be beneficial to see a break of weekly support around .9425-.9450; at that point there will be more confidence that the marketplace shares in this view of the currency pair.