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By HaleStewart December 12, 2013 8:33 am
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Dollar Continues to Rise Verses Canadian Dollar Thanks To Slightly Better US Economy

Above is a chart of the USD/CAD, which has been in a slow, general uptrend for the last year.  Notice the trend line that connects the lows of mid-January, early May, mid-Septermber and mid-October.  There is also a sharper upward trend that connects the recent lows of mid-September and late-October (which prices have recently broken.  The two price highs of early July and early September in the 1.053 and 1.056 area are providing technical support right now.  While the momentum trend is generally positive, don't be surprised to see prices fall back to the 50 day EMA around 1.05.  However, it will take more the a simply, short-term technical consolidation to stop the near year long rally.

That leads to a question of why is this trend happening.  It's not because of the interest rate differential, which should favor the Canadian dollar:


The real answer lies in the Candian economic situation relative to the US'.  Consider this analysis provided by the latest Monetary Poilcy Report for Canada:

In Canada, uncertain global and domestic economic conditions are delaying the pick-up in exports and business investment, leaving the level of economic activity lower than the Bank had been expecting. While household spending remains solid, slower growth of household credit and higher mortgage interest rates point to a gradual unwinding of household imbalances. The Bank expects that a better balance between domestic and foreign demand will be achieved over time and that growth will become more self-sustaining. Real GDP growth is projected to increase from 1.6 per cent in 2013 to 2.3 per cent in 2014 and 2.6 per cent in 2015. The Bank expects that the economy will return gradually to full production capacity, around the end of 2015.

One component of GDP -- personal consumption -- is doing well.  But exports and business investment are lagging.  Because Canada is far more export oriented than the US, a slowdown in exports (and the global economy as a whole) has a far stronger negative impact on the Canadian economy.  In contrast, consider this statement from the latest Beige Book issued by the US Federal Reserve:

Manufacturing activity continued to expand in most Districts, with gains noted in the motor-vehicle and high-technology industries. Manufacturers in many Districts expressed optimism about near-term growth prospects. Demand for professional business services experienced stable to moderate growth, especially in computer technologies. Freight volume showed signs of strengthening. Reports on retail spending were positive. Looking forward to the holiday shopping season, retailers reported being hopeful, but cautious. Sales of new motor vehicles were reported as moderate to strong across much of the United States. Tourism increased in most reporting Districts, although the federal government shutdown had a negative impact in some areas. Residential real estate activity improved across many Districts, with multifamily construction experiencing moderate to strong growth. Some slowing in single-family home sales was attributed to seasonal factors. Activity in nonresidential real estate was stable or improved slightly across many Districts. Agricultural conditions were generally favorable. Mining activity was mixed, while natural gas production increased. Banking conditions were largely stable, with some improvement seen in loan demand. Several Districts reported an easing of lending standards.

The US economy simply has a broader source for growth right now.  Consumers are still spending at decent levels.  But manufacturing is also growing, investment is rising, housing is making a comback and exports are increasing.  It's simply a more positive economic situation.   

When comparing the US to the Candian economy, it's not that Canda is sinking into quicksand.  It's that the US economy is simply doing just a bit better, leading to the uptrend in the USD/CAD chart.

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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