Correlations point to a loonie long
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Market Correlations and Yields
The Canadian dollar is highly sensitive/correlated to oil and natural gas prices, as Canada is a big producer of both. Hence its economy is influenced by fluctuations in their prices. Higher oil and natural gas prices usually help the Canadian dollar and push the USDCAD lower.
I have plotted the natural gas, oil and Canada/U.S 2-year bond yield differential on chart. Along with the CADUSD( NOT USDCAD, just to illustrate the positive correlation).
Recently, the price of both commodities has been trending higher, recoding new highs. Yet the cad didn’t catch up until the past few weeks, and with a relatively smaller magnitude. This lag in cad price movement might be an opportunity to get long as the price play catchup.
The yield differential also support the cad side as the spread rises in favor of Canadian bonds. Supported by solid recent economic data from Canada.
Having that said, I see the USDCAD heading lower. My concern now should I buy the CAD against the dollar or euro? or maybe both to mitigate the risk of failure.
The Canadian dollar is highly sensitive/correlated to oil and natural gas prices, as Canada is a big producer of both. Hence its economy is influenced by fluctuations in their prices. Higher oil and natural gas prices usually help the Canadian dollar and push the USDCAD lower.
I have plotted the natural gas, oil and Canada/U.S 2-year bond yield differential on chart. Along with the CADUSD( NOT USDCAD, just to illustrate the positive correlation).
Recently, the price of both commodities has been trending higher, recoding new highs. Yet the cad didn’t catch up until the past few weeks, and with a relatively smaller magnitude. This lag in cad price movement might be an opportunity to get long as the price play catchup.
The yield differential also support the cad side as the spread rises in favor of Canadian bonds. Supported by solid recent economic data from Canada.
Having that said, I see the USDCAD heading lower. My concern now should I buy the CAD against the dollar or euro? or maybe both to mitigate the risk of failure.
Note
BOC ends QE (market expected tapering by 1 billion). Also see inflation target to be achieved in the "middle quarters of 2022" (instead of the second half of 2022 mentioned in September statement). Great news for the #cad and my long CAD trades.
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