Monday, January 20, 2014

Earthquake rattles NZD Forex pairs | Canadian dollar on the move

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In a nice piece of dramatic irony over the weekend just gone a 6.2 Richter Scale earthquake struck a part of New Zealand, where rebuilding of the city of Christchurch after the 2011 seismic upheaval is forecast to provide one leg of the stimulus that might raise the value of the New Zealand dollar in the coming weeks and months. Happily, on this occasion there were no casualties and damage was reported to be slight. As a consequence the AUDNZD chart went in the wrong direction for our short position, however, causing us to be stopped out. We were operating with a tight stop [-loss order].

Canadian dollar on the move

While the Canadian dollar would seem to have been losing value for some time now against the US dollar, in historical terms it has been gaining strongly, as measured by the fact that the USDCAD pair has been going down over time (see the chart above, which goes back to 2002). The pronounced bump in the middle of the chart is the effect of the Great Financial Crisis, when all markets lost their heads for a little while.

The Canadian dollar, or the Loonie as it is known, is a commodity currency. It gained in value prior to the financial crisis because in that period oil, in particular, was going through the roof. Who will forget the excitement in 2008 when it passed the US$100 per barrel mark? After the crisis, the Loonie gained because of quantitative easing in the USA, which was contrasted at the time of the crisis by relatively responsible behaviour on the part of Canadian banks, which left the Canadian monetary authorities with a relatively benign economy to deal with while great swathes of the rest of the developed world were clinging on for dear life.

Now things are changing. QE in the USA is on the way out and that nation is also becoming, once more, self sufficient on oil, due to shale oil reserves and the increased use of fracking for its extraction.

According to the chart above, there is plenty of upside still for the USDCAD pair. However, it is on the cusp of a serious technical resistance level, signified by the dotted horizontal line on the chart. It will now be necessary to wait and see if and how it manages to negotiate that. 

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