Magazine article Modern Trader

Canadian Dollar-Golden or Leaden?

Magazine article Modern Trader

Canadian Dollar-Golden or Leaden?

Article excerpt

Analysts often tie the fate of the Canadian dollar to commodity prices. Unfortunately, this relationship is periodic at best. For example, while gold fell from about $500 per oz. to $350 per oz. from 1988 through the end of 1991, the Canadian dollar rallied about 20%, reaching a 1.1190 rate vs. the U.S. dollar. Gold since has moved sideways to lower, while the Canadian dollar has weakened.

Any negative correlation came to an end during the first half of 2002 as gold and the Canadian dollar both turned higher. The Canadian dollar moved from 1.6189 during December 2001 to 1.5032 during June 2002, before falling sharply in July. Gold rallied $50 per oz. from the end of December to $329 during June before sliding in July.

Despite expectations for lower levels in U.S. equities in the next 12 months, lower gold prices likely are ahead during that period. The risk to the global economy remains deflation, and gold is unlikely to rally amid falling prices.

The Canadian dollar should not suffer a similar fate. The reversal from the Canadian dollar's 1.5032 level in June came from very close to the 38.2% retracement of its drop from November 1996. Although that does not represent any apparent wave structure, its proximity to round number support at 1.50 helps pinpoint a short-term reversal. More important, 1.5032 was just below the 61.8% retracement, at 1.5034, of the five wave Canadian dollar drop from the 2000 low at 1.4320. The power of the rally was surprising and does leave minor risk of a retest back to the currency's worst levels set in late 2001 at 1.6189.

However, the relatively short period the Canadian dollar has been in rally mode suggests the currency will resume gains by September. Although there remains risk that the Canadian dollar could turn lower, there at least should be a run to this year's highs, and more likely to the 38% retracement of the whole move since 1991, which comes in at 1. …

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