|
 "Loonie" Tunes in Canada Against the Euro
by Kevin Pendley
Back in the mid-90s when I oversaw an office in Detroit, I used to pop across the border to Windsor, Canada, and hit the local casinos. It was a fun way to feel like a high roller for an evening, since the Canadian dollar exchange rate was about $0.60 to the greenback. Nowadays, the Canadian dollar (affectionately known as the loonie among many FX traders), is actually trading close to par against the mighty U.S. dollar. That's right, our northern neighbor with a population about the size of the metropolitan New York area has similar purchasing power with the U.S. dollar.
The Canadian economy has close ties with the United States and if we slip into a recession, then it will have a powerful impact on the Canadian situation as well. However, much of the "bad news" has been priced into exchange rates around the world, and the euro currency appears to be at a potential top against a host of foreign currency markets. The loonie is no exception.
Speaking of lunacy, if you think the housing market in California or the French Riviera is insane, how about a nice cozy two bedroom/one bath apartment in Northern Canada for $4,000 a month, or a modest home for $400,000 dollars in Northern Alberta? Hey, at least California and the French Riviera have the bonus of wonderful climate, upscale surroundings, fabulous beaches and unlimited entertainment choices. You know what the average low temperature is in Fort McMurray, Canada in January? Try minus 13, and less than seven hours of sun in the dead of winter. So, what does Fort McMurray have that California and the French Riviera do not? How 'bout oil reserves. Black gold, Texas tea, whatever you want to call it... Northern Alberta in Canada has it. In fact, the Athabasca Tar Sands, located in Alberta is sitting on the second-largest oil reserve in the world. Given the explosion in oil prices recently, it's clear that Canada's oil production would be a boon to the economy and the currency.
As the price of oil skyrocketed in recent years, it has become profitable to extract the oil from the tar sands in northern Canada, and what used to be a sleepy community in Fort McMurray has exploded into a modern day version of the old West style mining boomtown. In 1971, Fort McMurray had a population of 6,743 people, but it'll probably be over 100,000 soon (if it's not already). The funny thing is that Fort McMurray isn't even an official city, but it's one of the larger population centers not located near a border or major body of water in Canada.
Speaking of demographics, Canada's population is pegged at about 33 million people, or the 39th most populous country in the world, sandwiched between Algeria and Afghanistan on the body count register, and below countries like Tanzania, Sudan and Kenya. But that tiny Canadian population rests within the second largest body of land on the planet and is rich in natural resources. Not only does Canada have the second-largest oil reserve in the world, but they are the largest producers of zinc and uranium and are major providers of wheat and canola. Here I thought the only thing Canada produced of note was moose, beer and hockey. In a world that will continue to devour physical goods to meet rising population and loftier living standards in Asia, the ability to produce and export commodities to the rest of the planet is a major long-term plus.
So, how do all these nifty factoids tie in to our earlier statement that the Canadian dollar is a potential buy against the euro? Since bottoming out in November 2007 at 1.3278, the euro has exploded against the loonie, soaring 22% to a peak at 1.6324 in late March. However, as you can see by the attached chart, the euro/Canada cross appears to have rolled over into either a major top or corrective phase.
We had fun with some of the facts and demographics about Canada, but what is going on with the eurozone right now? In recent days, retail sales out of Germany missed the forecast, factory orders were softer than expected and ratings agency Fitch cautioned that European banks were at risk of becoming dependent on the ECB for funding, which they said was "unsustainable." If the data out of euro-based countries begins to take a downturn, it will only fuel the recent downswing we've seen in the euro against the U.S. dollar, and most likely against other currencies as well. If you're spotting a trend on the FX columns so far, you're right … this makes three consecutive columns that have put a spotlight on currencies to buy against the euro.
From a charting perspective, the euro/Canada market is on track to close below opening levels for the fourth consecutive week, something that has only happened once since a big downtown took hold in this cross back in early 2007. One could argue that a five-wave Elliott Wave top is visible on weekly studies and that a major correction has begun. Euro/Canada has already tumbled 5% from high to low in three weeks, and bounced off the first key support test in the 1.5500 zone. That area marks logical chart support and could take some work to crack. However, if snapped, it opens the door to downside targets at 1.5161 and perhaps even down to 1.4801 in the weeks to come. The ideal shorting zone for this cross is around 1.5680 to 1.5775.
Kevin Pendley has been involved in financial and commodity markets for two decades, including more than 15 years with Knight-Ridder Financial News/BridgeNews. In addition to his work at 4xAdviser.com Weekly, he is a contributor at SmallCapInvestor.com where he writes a weekly technical analysis column on the Russell 2000.
Disclaimer and Important Information
The opinions and statements included herein are based on sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. We have not independently verified the information contained herein. This information is not intended to be used as the sole basis of any investment decisions, nor should it be construed as advice designed to meet the investment needs of any particular investor. We encourage you to consult with independent financial advisors with respect to any investment in the securities mentioned herein.
You should review a complete information package on all companies, which should include, but not be limited to, the company's annual report, quarterly reports, press releases and all regulatory filings. All information contained in this profile should be independently verified with the subject company. The foregoing discussion contains forward-looking statements, which are based on current expectations, estimates and projections, and differences from such expectations, estimates and projections can be expected. BFP does not purport to be a complete analysis of every material fact respecting any company, industry, or security.
Any opinions expressed on this site are statements of judgment as of the date of publication and are subject to change without further notice, and may not necessarily be reprinted in future publications or elsewhere. Neither BFP nor its members, managers, officers, or employees/consultants accept any liability whatsoever for any direct or consequential loss arising from any use of its publications or their contents.
|
