Trading Post

January 4, 2012 7:08 pm

Risk appetite drives the ‘loonie’

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Currency’s strength is correlated to firmness in growth-focused assets

Forex markets love a good technical trigger, and we may have just seen one in the Canadian dollar.

The “loonie’s” cross with its US namesake this week dipped below its 100-day moving average for the first time since the end of June.

As analysts at Bank of America Merrill Lynch note, the break opens the downside to parity and the next support at the 200-day moving average, currently about C$0.99.

Yield differentials remain in the loonie’s favour. At the time of writing, two-year US bonds are offering 0.26 per cent but Canadian equivalents are giving 0.97 per cent, reflecting central bank interest rates.

Indeed, Tuesday’s Federal Reserve minutes may encourage some to believe the US is more likely to ease monetary policy further.

The more important driver for the Canadian dollar is risk appetite, however.

Loonie strength is closely correlated to firmness in growth-focused assets, particularly commodities.

If traders don’t want to be hostage to “risk on/off” they can always play the euro/loonie pairing. At C$1.32 this is near a 12-month low, and arguably more reflects fiscal health differentials.

jamie.chisholm@ft.com

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