Category — Oil

The Canadian dollar reached a 30 year high at 94.79 U.S. cents. Even though it has fallen since, an increase is still possible after today’s U.S. government report showed a decrease in new home sales 930,000 in April to 915,000 in May. New homes were sold at a median price of $236,100, down .9 percent from a year ago. Due to this decrease there has been reason to believe that the U.S. Federal Reserve will begin cutting interest rates causing investors to be prone to selling the U.S. dollar allowing the Canadian dollar to gain.

Further Canadian dollar gains are very possible, but it is important to be aware of the other factors affecting currency fluctuations. As Canada and the U.S. have a close trade relationship, a slowing U.S. economy could spill over into Canada resulting in a Canadian dollar could losing ground to major foreign currencies such as the euro and the pound.

Additional factors affecting the value of the Canadian dollar are crude oil prices and Central Bank lending rates. Crude oil prices have been declining and could hurt gains made from the U.S. housing report. Due to the fact that oil makes up half of Canada’s commodities exports, decreasing oil prices will hurt the Canadian economy. This in turn will make its currency less valuable. Lastly, there is still uncertainty as to whether the Canadian central bank will raise lending rates for its currency. On May 29^th this year, the central bank had announced a possible increase in rates because inflation was not at the target level. However, this change has not happened yet as the lending rate has continued to be at 4.25%, the same since May 2006. The Canadian dollar will see a short term gain with news of slowing new U.S. home sales, but it remains to be seen whether it can maintain this gain in the long term.

There are numerous methods of trading oil. Futures is the method most commonly used and the most popular. While futures are a pure oil play, there are also drawbacks to trading oil futures. One of them is when you buy and hold oil you pay the carrying charges priced into the oil futures, where most investments have some sort of positive yield. When trading currencies you can earn the yield when doing an oil play and also do it in a low cost, highly liquid market. Take a look at this chart for a comparison.

We write about the USD/CAD again, this time after it did in fact breakout of the range as I mentioned in an earlier post. Not only did it breakout of the range, but it closed at a new daily high. We have not seen it close this high since December 28th, 2005! Oil prices didn’t help the Canadian Dollar much as oil dropped lower to now around $56.85 per barrel. There isn’t much in the way of resistance until 1.1975, the 11/15/2005 high.

As oil prices have been falling in the last week or two, so have the currencies of the heavy oil exporting countries including the Canadian Dollar and the Norwegian Krone.