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By HaleStewart January 10, 2014 7:21 am
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Dollar Breaking Out Versus the Loonie on the Weekly Chart

Above is a weekly chart of the USD/CAD.  It shows a rounding bottom formation that started in the third quarter of 2009.  Recently, prices broke through the 1.06-1.08 level where a fair amount of resistance remained from prints in 2009.

So -- why the breakout?  The central reason is the Fed's announcement that it will start to taper its bond buying program.  The underlying reason for this is the continued perceived strengthening of the US economy.  At the same time, Canda is trying to rebalance it's economy, but is instead running into trouble.  From the latest Bank of Canada policy announcement:

In Canada, underlying growth is broadly in line with the Bank’s projections in its October and July Monetary Policy Reports. Real GDP growth in the third quarter, at 2.7 per cent, was stronger than the Bank was projecting, but its composition does not yet indicate a rebalancing towards exports and investment. The housing sector has been stronger than expected but is consistent with updated demographic data and a pulling forward of home purchases in light of favourable financing conditions. The Bank continues to expect a soft landing in the housing market. Non-commodity exports continue to disappoint and the price of oil produced in Canada has eased further. Business investment spending is up from previous low levels, but is still recovering more slowly than anticipated. On balance, the Bank sees no reason to adjust its expectation of a gradual return to full production capacity around the end of 2015.

The central bank is looking to see stronger export growth from the economy, which is in line with one of Canada's primary strengths -- raw materials.  However, the latest trade deficit numbers were no encouraging in this regard:

 

In November of 2013, Canadian trade deficit increased slightly to CAD 940 million, up from CAD 908 million in October, as imports edged up 0.1 percent, while exports were unchanged.
 
Exports were unchanged at CAD 39.8 billion, as prices increased 0.7 percent while volumes were down 0.7 percent. Basic and industrial chemical, plastic and rubber products; energy products; industrial machinery, equipment and parts; and consumer goods recorded the largest declines in exports. Motor vehicles and parts had the largest increase. 
 
The latest trade figures show that exports didn't increase in the latest report.  Also consider the longer time series of Canadian export figures:
 
Exports have been stuck between 39,000 (million) and 40,000 (million) for the last 10 months. 
 
Expect this trend to continue so long as the news from the US remains strong.
 
Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer
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