The Canadian Dollar Goes Nuts! Friday, December 7, 2007

Joined : 23 Dec 2007 Posts : 235 Location : Nigeria

Making 'Cents' of the Headlines
The Canadian Dollar Goes Nuts!

What Happened:
On Thursday, Canada released their Ivey PMI numbers.

The Ivey PMI number is basically a survey of purchasing manufacturers. This number assesses employment, production, new orders, supplier deliveries, and inventories.

A reading above 50 means that manufacturing is expanding. That's a good thing for the Canadian economy. If the number falls below 50 then it means the manufacturing sector is contracting. That would be a negative both for the Canadian economy and the Canadian dollar.

The Ivey PMI number can be a leading indicator of things to come. After all, these purchasing managers get a "read" on the economy because they hear about the demand for their goods from both corporations and individuals.

The number came in at 58.7 vs. 55 expected. So it crawled up above both the expected number and the previous reading too.

How the Markets Reacted:
The Canadian dollar went nuts afterwards! The loonie shot up 100 pips both against the U.S. dollar (USD/CAD) and the Japanese yen (CAD/JPY).

What We Say:
It's not all good news. Lately things have been turning a bit south for Canada's economy. The highest exchange rate in over 30 years is crushing exports right now.

In fact, the next head of their central bank (which will take office in February) discussed the possibility of intervening in the currency market along with "taking other actions." This tells me that the high CAD exchange rate is really hurting them.

Also, the sluggish U.S. economy is dragging down their economy, because the U.S. is their major trading partner. We are one of their largest buyers of lumber, oil etc. We, in the United States, are one of Canada's largest buyers. So if we're hurting, we can't buy as much. Therefore Canada can't export as much.

At some point, our dead weight will start to pull down their economy. So that's why the Bank of Canada cut interest rates this week. They were hoping to give their economy a shot in the arm so it could recover from the slowdown.

So while much of their economy may be slowing down, we're still getting positive manufacturing readings. That explains the soaring "loonie."