By Seth Harvey

Likely to the delight of EDC Chief Economist and Vice-president Peter Hall; and certainly to the chagrin of revered trader Dennis Gartman, it appears as though the recent strengthening of the Canadian dollar versus the US Dollar is reversing.

Since mid July, through normal oversold valleys and correctional peaks, we have observed a distinct bearish directional bias in USD/CAD.  This down trend was initially breached on Jan 26^th as CAD slid over 125 pips closing the day at 1.0624 (94.12).  The subsequent three closes saw prices above this trend line, indicating a fairly decisive reversal.  Notably, however, we have yet to see a move to the November 6^th high 1.0748 (93.04) that marks topside resistance of the 1.0203 – 1.0748 range that the pair has traded inside for the last three months.  A close north of this level likely opens up possible price action that could quickly take USD/CAD higher.  Using Fibonacci Expansion we would suggest possible highs of 1.0839 (61.8%), 1.1030 (100%) and 1.1339 (161.8%) for resistance targets on a move right.

That price action over the past weeks has been steadily in favour of the USD is in itself a signal that a correction may be looming on the horizon.  For rarely have we seen such a persistent bias in this North American cross since the relative consolidation following the violent market conditions of the post-credit-crisis environment.  It has of late been stated on more than one occasion that the Loonie tends to act as its name implies, and that any technical predictions should be regarded with caution.   Still, we hope that Mr. Gartman took profit when profits were for the taking.



    The last time the Bank intervened in foreign exchange markets to effect movements in the Canadian dollar was in September 1998.  Prior to September 1998, Canada's official policy was "to intervene systematically in the foreign exchange market to resist, in an automatic fashion, significant upward or downward pressure on the Canadian dollar."  Simply put, the BOC did its best to keep the Loonie consistent, not pegged like China's currency, but less volatile then we see today.  In September 1998, the policy was changed because of the ineffectiveness of intervening to resist movements in the exchange rate caused by changes in fundamental factors. Today Canada's current policy is, "to intervene in foreign exchange markets on a discretionary, rather than a systematic, basis and only in the most exceptional of circumstances."  Though this seems like a very open-ended policy, the cautiousness of the BOC coupled with the preceding policy translates into nothing done over the last ten plus years.  Despite lows near 1.70 and highs of nearly .90 (all numbers versus the USD), the BOC did nothing.  Is today any different?  Despite the near 80 cent fluctuation in the Canadian dollar over the past 10 years, the currency has generally followed the peaks and troughs of the Canadian economy as a whole.  Today the economy is slowly climbing out of one of the worst economic troughs of the past 60 years, but the Loonie continues to hang around par with the US Dollar.

    This is clearly not the right time to see par with the USD.  According to one estimate, every 1 cent increase in the Loonie against the Greenback costs the country $2 Billion in export revenue and 25,000 jobs.   The chief economist for CIBC, meanwhile, has warned that many companies are in the process of making long-term direct investment decisions, and could be discouraged from locating in Canada because of perceptions that its currency will remain strong for the immediate future: “If the loonie is overvalued for a few years, we may be sacrificing business plant and equipment on the altar of a strong currency.”  Investors and speculators alike have concluded that the BOC was not prepared to put its money where its mouth was, so to speak. The term “jawboning” has become the preference of columnists and investors when discussing the resolve of the BOC. The belief was that the BOC had concluded that intervention was essentially a futile proposition (based on its failed efforts in the late 1990’s), and that it would instead resort to making idle threats.  However, Mark Carney should follow the lead of the Swiss Central Bank, which ultimately and successfully intervened on behalf of the Franc in recent years.  The BOC needs to stop talking the Loonie down and actually take measures to push the currency weaker.  Carney should exercise the last paragraph of the BOC's "Intervention in the Foreign Exchange Market Policy".  This states, "If the government and the Bank want to moderate a decline in the relative price of the Canadian dollar, the Bank will buy Canadian dollars in foreign exchange markets in exchange for other currencies, mainly U.S. dollars, which come from the Exchange Fund Account. This boosts demand for Canadian dollars and helps support the dollar's value." It continues to denote that, "to make sure that the Bank's purchases do not take money out of circulation and create a shortage of Canadian dollars, which could put upward pressure on Canadian interest rates, the Bank "sterilizes" its purchases by redepositing the same amount of Canadian-dollar balances in the financial system."  This proposed action does not have to be implemented often, but it does need to be done in order to show the market that the BOC is not all talk, but indeed action.



The dilemma boils down to a couple of key economic points on either side. A weaker dollar increases exports as domestic products become cheaper to the foreign consumer, yet it also decreases imports as they become more expensive to buy, ultimately shrinking a Trade Deficit. This results in job creation domestically, bolstering the economy and increasing GDP. Still, the conception of this type of policy causes foreign investment to shrink and in this particular case inflation is a possibility, as so much of the world’s major products are priced in US dollars (i.e.oil). This will lead to higher interest rates.

To this end, it may be a question with no definitive answer. However, with the current state of the economy and its record low interest rates, it seems logical why the US regulators are not as vehemently opposed to a

For Canadian business however this range seems to be a cause of distress. Understandably for our exporters as their competitive advantage is all but gone and their 2010 business plans are already obsolete if they’re priced anywhere close to Bank of Canada’s targeted rate. On the other side we have our exporters that seem

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