Friday, September 21, 2007

Loonies And The Great White North

While the loonies above are entertaining, they are not the Loonies everyone is talking about. The Loonies making the news is the Canadian Dollar and its exchange rate reaching parity with the U.S.Dollar. The strengthening of the Canadian Loonie has not been an overnight event. Two books sitting here within reach of my computer show how the exchange rate has reversed course. One book published in 2003 has a price tag of $26.95USD with the corresponding price of $41.95Canadian Dollars. Another book published in 2005 has a price of $23.95USD compared to $32.95CAD. The chart Below shows the move over the past few years.

U.S. Dollar vs. Canadian Dollar

For the first time in nearly 31 years, it look less than one Canadian dollar to buy one U.S. dollar. The rise in value of the Canadian dollar is an energy story. With crude oil futures trading at more than $83 U.S., investment capital is pouring north to help extract oil from so-called tar sands, also known as oil sands, in the province of Alberta. The average cost to produce a barrel from tar sands is $40 to $45. Regardless of currency exchange rates, investing in Alberta is a bullish trend, boosting demand for the loonie. With rumors that Saudi Arabia could seek to abandon its U.S. currency peg only making things worse. It seems like a perfect storm for the U.S. Dollar and the Federal Reserve stepped right into it when they cut rates 0.50%.

Below is a chart comparing interest rates of the 5,10,and 30 year interest rates. As can be seen, rates have actually gone up since the Federal Reserve cut the Fed Funds and the Discount Rate. This happens because the rate cut caused weakness in the dollar and causes selling in the longer term treasury bonds. With rates on the 30 year going up, it seems that the rate cut is not going to help the housing market. It is however helping the carry-trade and has money flowing into emerging markets.

Interest Rates vs U.S. Dollar

If this decline in the U.S. Dollar continues, it is going to make it hard for foreign investors to hold U.S. debt and equities. The countries that are doing well have strong exports and strong commodity based economies. Below are a few charts of ETFs and currencies that show some of these countries. Today is option expiration and once out of the way should lead to some interesting moves next week. It won't be boring.

EWA - ishares Australia

Australian Dollar

EWC - ishares Canada

New Zealand Dollar

Following the currency markets overnight can give a clue to what the equity markets might hold for the day. There are many free demo trading forex accounts, but the charts posted here are some of the better ones I have come across. They are available through fx solutions. There is a link to their site just under the Blog Archive to the right of this article. The free demo account is worth doing just for access to charts and the 100 or so indicators they offer.

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