Among global currencies and currency exchange traded funds, the U.S. dollar and the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP) usually command most of the attention, but for those investor that use other currency ETFs, it might be time to look north.
With oil rebounding this year, so is the Canadian dollar, also known as the loonie, and that is good news for the CurrencyShares Canadian Dollar Trust (NYSE: FXC). FXC, which tracks the movements of the loonie against the U.S. dollar, is up more than 3% over the past month. However, some currency market observers believe the loonie’s recent move to the upside could be ready to stall.
“The loonie has gained about 4 percent against the U.S. dollar since touching a 10-month low at the end of last year amid higher oil prices and a weaker greenback. But looming are possible U.S. trade talks, a weak economic recovery and a potentially dovish central bank. These fundamental factors, along with technical indicators, point to a potential reverse,” according to Bloomberg.
Canada enjoys large natural resource reserves. As we have witnessed, Canada’s oil production could either lift or weigh on the economy, depending on the energy market. Additionally, as we hear more about droughts and dry weather conditions, Canada’s freshwater reserves, which account for 20% of the world’s freshwater, could come into play.
It could be the Canadian dollar’s often intimate correlations to oil prices that keep a lid on the currency over the near-term.
Otraders are concerned over how fast U.S. shale oil producers will increase production to capture the rising prices. Rig counts have recently ticked higher and with credit and earnings issues improving for some U.S. shale drillers, those companies may seize the opportunity to exploit higher pricing in the near-term.
“One of the barriers to further Canadian dollar gains is a gap in monetary policy. The Federal Reserve is expected raise rates, while the Bank of Canada is seen on hold. Investors should continue to take advantage of the carry trade, widening the spread between the sovereign two-year yields and pressuring the currency,” according to Bloomberg.
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