Forex Investment and Currency Trading

The move in USD/CAD on October 10, 2008 was the second largest daily change in percentage terms on record back to 1951. Only June 1, 1970 was larger, following the decision to float the Canadian dollar and abandon the Bretton Woods system of fixed exchange rates. Fundamentals do not usually change so abruptly. Even so, recent sharp declines in a wide range of commodity prices do demonstrate how quickly CAD fundamentals have changed for the worse.

USD/CAD dramatically rallied on Friday October 10. From a prior close of 1.1458, USD/CAD surged to 1.1818, although it had hit a high of 1.2135 in the largest single daily level change on record back to 1951. The 3.1% change on Oct 10 was the second largest on record, with top honours still going to June 1, 1970. That move occurred the day after Finance Minister Edgar Benson made the  statement to float CAD and abandon the Bretton Woods system of fixed exchange rates, launching the era of flexible exchange rates. Thus, June 1 1970 came after a clearly identifiable change in CAD’s structural fundamentals — a change from a fixed to a floating exchange rate. Short of such an event, fundamentals do not tend to change that dramatically in a short time frame. Hence, the USD/CAD on October 10 does seem to have represented an outbreak of irrationality ahead of what might turn out to have been one of the most crucial weekends in global financial market history as G7 finance ministers met in Washington.

However, the fundamentals for CAD have deteriorated sharply and one might be excused if it appears as though the change happened almost overnight. The global economic outlook was deteriorating as far back as Spring 2008, but it was only in the last couple of weeks that concern about the global outlook became a more prominent concern, with the interlined global financial system on the verge of breaking apart. This is reflected in the sharp rally in USD/CAD, and the slide in commodity prices, such as the CRB index.

There have been few, if any, areas in the commodity market that have escaped severe damage since the Summer. A casual perusal of almost any commodity price or commodity price index shows staggering declines in recent weeks/months. While USD strength is one factor in these moves, the deteriorating global growth backdrop can’t be ignored in explaining the dramatic slide in a vast array of commodity prices and commodity indexes. Energy prices, nonenergy base metals prices, precious metals prices, and agricultural commodities have all seen significant double-digit declines since July 15, with many suffering much of their losses from September 29 to October 10. The USD rally over this period cannot fully explain the carnage. While astonishingly rapid, the USD/CAD rally does reflect that global economic fundamentals have turned CAD-bearish, even if the pace of the recent USD/CAD move is extreme and proves to be overdone.