The Canadian Dollar is primarily a commodity based currency. Whether the commodity is being extracted, processed or exported, the commodity itself touches a lot of Canadian hands on its way out the door. As such, it’s not surprising that the recent commodity rally has sparked a bid in the Canadian Dollar just as the oil and grain washout contributed to its oversold condition at the beginning of this year. This week, we’ll look at some fundamental background, then illustrate the current situation and the setup we see coming on the included Canadian Dollar weekly and daily charts.
The Commodity Futures Trading Commission releases its Commitment of Traders data weekly. This data tracks the amount of buying or selling in the commodity markets by the markets’ primary trader categories. I review this data every Sunday night when I begin compiling my trading plan for the coming week. The Canadian Dollar has hit my radar for each of the last three weeks as the commercial traders’ position has grown faster than at any time in the past and their total position has only been exceeded once in the history of the data set.
The Commitment of Traders data goes back to 1983 in the Canadian Dollar and the first meaningful blip on the radar shows up in February of 1986 when the Canadian Dollar bottomed around $.69 cents to the U.S. Dollar. Commercial traders went from neutral to net long more than 9,400 contracts, the equivalent of nearly $1 billion dollars at full contract value. The market rallied nearly 6% over the next three months. Commercial traders next set a record long position in March of 1990 at 10,270 contracts or, just over $1 billion at full contract value and the market rallied 5.5% in the next few months.
Commercial traders’ buying the futures doesn’t always lead directly to a rally. There are times when it simply slows the decline as they cover short positions, as well. There are considerable spikes in August of 1993 and January of 1995 when the Canadian Dollar had been on a steady decline since its $.90 cent peak in 1991. In fact, the commercial buying peaked at 28,000 contracts at the bottom of the market in January of 1995. In this case it’s important to remember the old rule, “Whether getting long or, covering shorts; buying is buying.” It would take another three years and the, “Asian contagion” to generate enough commercial interest to eclipse the buying peak at the 1995 trough.
The Canadian government has done an amazing job of revamping their monetary policies and budgets over the last 15 years. The primary impetus for this was the 1995 budget, which cut governmental spending across the board while allowing greater freedom to the individual provinces as to how they could spend the federal money they received. The provinces were then able to target the funds to their individual needs. Furthermore, the corporate tax and capital gains taxes were restructured to facilitate capital expenditures and new business generation. Finally, they implemented a federal General Services Tax. This is similar to the European Union VAT (Value Added Tax), which is a consumption tax that is paid proportionately by higher income people who spend more.
These changes significantly improved the Canadian economy. Their workforce has grown substantially. Unemployment has declined and jobs have been added to the economy. Welfare recipients declined along with the percentage of people below the poverty line. In fact, the number of low-income families declined by more than 30%. This was all achieved while cutting their debt to GDP ratio from 80% down to 45%. Their current debt to GDP has now reverted back around 85% due to the economic collapse. Meanwhile, our debt to GDP ratio has surpassed 100%. There is no question that our neighbors to the north are doing a far better job of maintaining their budget than we are.
The total net long record for commercial traders in the Canadian Dollar is 105,543 contracts. Commercial traders accumulated a net position of $10.5 billion dollars worth of Canadian Dollars in January of 2007 when the market was trading at $.85 cents to the U.S. Dollar. The Canadian Dollar then reached a record high of $1.10 by early November that same year. Equally important, these same commercial traders had pared this position down by more than 90% at the high water mark. That, my friends, is pretty darn good trading.
Currently, we have seen commercial traders’ positions increase from 4,431 contracts in mid January to more than 86,000 contracts, currently. The Canadian Dollar is currently trading around $.97 to the U.S. Dollar. This market has held above $.95 for the better part of the last three years. We view the strong commercial purchases as a sign of supporting the market at these levels. Commercial traders have demonstrated their forecasting ability admirably in the past and we will lean on them for support as we buy into this market. However, managing risk is always our number one concern. Therefore, we will place our protective stop under the current swing low of $.9650 in the June Canadian Dollar futures as we anticipate a move back to parity with our U.S. Dollar.
This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.