Canadian Dollar: Battling $89 Oil and Weakening Economic (page 1 of 2)

DailyFX Fundamentals 10-18-07

By Kathy Lien, Chief Strategist of DailyFX.com

EUR/USD: Is 1.45 Next?

The mighty greenback is no longer mighty after having fallen to a historic low against the Euro at the beginning of the US trading session. Rising expectations for an interest rate cut has been the primary culprit for dollar weakness. On Monday, the market was only pricing in a 32 percent chance that monetary policy will be eased at the end of this month, but now interest rates futures show a 70 percent chance of that happening. Given the sharp shift in interest rate expectations, it is not surprising to see traders adjust their positions in the US dollar. With one central bank at the brink of lowering interest rates again and another still warning of about raising rates, there is scope for further EUR/USD strength. Now that the EUR/USD has broken its prior all time high of 1.4282, there is no clear resistance until 1.45 which is a psychological level. The latest developments have resurrected talk of a recession. We think that this is premature given the recent consumer spending and labor market reports. This morning, leading indicators increased 0.3 percent, which was right in line with expectations. Jobless claims and the Philly Fed survey weakened. Shipments dropped in the month of October, which is a very rare occurrence while inventories also fell to the lowest level in the past 5 years. The deterioration in the manufacturing index suggests that the benefits of a weak dollar have been limited. Risk aversion is still a problem for the markets as the spread between US treasuries and 3 month Eurodollar contracts continue to widen. This spread is an indicator of credit risk therefore an increasing spread indicates increasing default risk. Today, the TED spread surged to the highest level since the beginning of the month. There is no US data on the calendar tomorrow which will leave the G7 meeting as the market's primary focus (Read our Special Report on What to Expect from the G7). Oil prices have also climbed to an all time high above $89 a barrel, which is weighing on the Dow. Although gasoline prices remain well off their April highs, they can rise at a blink of an eye which is why traders are walking on eggshells. When gas prices start to rise, there will be a ripple effect across the financial markets.

Canadian Dollar: Battling $89 Oil and Weakening Economic

Oil prices continue to press higher but the Canadian dollar has not extended its rise. Canadian economic data has been weakening and as a result, traders are having a difficult time figuring out which factor will have a more lasting impact on the Canadian economy. Yesterday Canadian wholesale sales dropped 2 percent and today, foreign demand for Canadian assets dropped CAD$3.83 billion as foreigners sold off C$5.4 billion worth of Canadian stocks. Although this could be related to the credit market crunch that hit the financial markets in August, the degree of the surprise leaves many traders wondering whether the Canadian economy will only get worse. This morning, the Bank of Canada released their monetary policy report which elaborated on the downward revisions to their growth and inflation forecasts. The bottom line is that they are worried about weaker US economic growth and the impact of a stronger than expected Canadian dollar. Consumer prices are due for release tomorrow - falling inflation pressures will continue to prevent the Canadian dollar from following oil prices higher. Meanwhile the sharp rise in gold prices has pushed the Australian and New Zealand dollars higher.