Why the dollar-Canadian dollar should rally higher

With euro-dollar short positions blown out of the water on the back of the European Central Bank meeting last week, which pair can we work with to express dollar strength?

 

Yesterday’s dollar-Canadian dollar high was the loftiest since September. This should not come as a complete surprise, as the pair is merely catching up with the latest macroeconomic developments. 

 

Indeed, I think dollar-Canadian dollar will be able to rally higher and reach the Ca$1.37 to Ca$1.40 range in the months ahead. I am happy to hold this view as long as price trades above the 20 November low of Ca$1.3270

 

After having grown by 0.9 per cent year-on-year in August, the Canadian economy suffered zero growth in September, according to the latest numbers. The primary reason for the decline in growth over the last few months was the soft commodity-related sector, in particular the oil industry, which is dragging down the Canadian economy.

 

As an example, crude oil prices tried to breach their August low of $37.88 yesterday and, with Opec not ready to limit the slide through output cuts, there is little reason to expect an immediate bounceback. This will put further pressure on the Canadian economy.

 

One channel which is currently under pressure and which may eventually force the Bank of Canada’s hand is the labour market. Figures released on Friday showed that Canadian employment declined by 35,700 net in November, while the unemployment rate increased to 7.1 per cent from 7 per cent. It wasn’t the manufacturing sector but services industries that cut jobs. This does not bode well for the Canadian economy.

 

If we look at the reasons for being bullish on the US dollar, meanwhile, the Friday non-farm payrolls report showed that the US economy created 210,000 new jobs in November, versus the 200,000 projected by a Bloomberg News poll. This should be more than enough to encourage the Fed to raise rates in December, and entice long dollar positions.

 

The stronger dollar is also creating havoc for commodity markets, which trade lower as the greenback gains. This in turn affects the Canadian economy negatively.

 

So there are good reasons to be gloomy about the Canadian dollar, and I think all of the above will be sufficient to generate a rally towards Ca$1.40 in the months ahead.