Forex Investment and Currency Trading

FX Bottom-Line: CAD’s commodity status is fading as the US credit crisis deepens. In its place, USD is emerging as the main driver of CAD/crosses as CAD’s North American status trumps all other considerations. This is not unchartered territory, but reflects a familiar relationship associated with US recessions. The USD roller-coaster ride is continuing and ‘clever money” is often caught wrong-footed, but as long as the US uncertainties linger CAD/crosses will take their primary direction from broadbased USD changes.

Crude oil rallied toward US$110/bl earlier this week. NOK obliged and followed oil higher to outperform its G10 peers. CAD, however, lingered at the bottom of the performance scale despite the rally in oil, gold and base metal prices. Not surprisingly, the underperformance of CAD/crosses coincided with broad-based USD weakness.

A complex interplay exists between the dominant factors underlying CAD. Commodities, monetary policy and USD are all important drivers of CAD, but depending on the business cycle and structural developments, one or two factors tend to dominate CAD trading. The super-cycle in commodity prices between 2003 and 2007, combined with the developments of the Alberta oils sands, elevated commodities and commodity related developments (M&A activity) to the primary CAD drivers. But as the US housing problems transformed into a major credit and confidence crisis, attention shifted away from commodities to broad-based USD moves