Forex Investment and Currency Trading

• In late 2007, USDCAD smashed through to 0.90 due to commodity prices, economic optimism M&A flows, and psychological factors. But the currency has since unwound somewhat since them as commodity prices have eased and Canada economy pessimism grown and as the USD has rebound – in recent weeks USDCAD has been around 1.15 to 1.21.
• Oil prices should remain soft as global growth slows and demand destruction kicks in. Other commodity prices, too appear to be heading lower.
• Bank of Canada expressed discomfort when CAD was beyond 0.95. With new Governor Carney, the Bank appears less inclined to actively discuss the currency, but the market still remembers Dodge.
• M&A flow appetite into Canada is diminished due to strong CAD and now falling commodity prices (marginal cost for new oil sands is $75-85/barrel). A sharply lower oil prices could be a longer run threat to the CAD.
• Canadian and U.S. monetary policy tend to track each other, so there is only limited opportunity for rate spreads to drive the currency.
• The upside risk is that the Canada economy is stronger than it looks, but the market is more focused on commodities and financial markets now.

Long-Term:

• CAD long-term fair value with U.S. is near PPP in 1.16 range; Canada much less productive than U.S.