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What’s next for the Cad

Written by A Forex View From Afar on Saturday, May 31, 2008

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GDP numbers this week revealed that the Canadian economy shrank for the first time since 2003. The release for the first quarter of 2008 revels a 0.1% contraction, falling from the 1% growth rate recorder in Q1 and Q2 2007.

The biggest drag for the economy was inventories, which weighed heavily on the GDP, by over 1%. Exports fell too, dragging down the GDP by over 0.3%. The big decline in both exports and inventories were blamed on the automotive industry, falling almost 15% from one quarter earlier.

Canada’s biggest trading partner is the US, both for the import and export industry, with the U.S. eating up almost 80% of Canada’s exports 2006 figures show, while 55% of Canada’s import are from US. It is quite interesting that imports to Canada had fallen in the first quarter, despite Canada having very strong growth in the private consumption sector.

The big drop in Canadian Inventories makes me think about the US Inventories adding a lot of points to the US GDP. If we took out Inventories from the US numbers, in the last two quarters, Q4 of 2007 and Q1 of 2008, the GDP would have come in negative. This however was the case it seems. The question is how come those inventories didn’t fall since U.S. production had weakened, as shown by the ISM number, Exports had increased and US consumption remained strong, but still Inventories didn’t reduce. That is very strange, something just does not add up there.

This certainly isn’t the case for the Canada, if we took out Inventories, the report would show an expanding GDP.

Another big concern for the Canadian economy can be the huge inflation rate that manufacturers have to absorb from raw materials. From March 2008 to April 2008 the inflation experienced by manufactures from raw materials was released at 5.1%, while from April 2007 prices had grown 23%. Huge by all means. At the same time, Canadian Factories increased prices by 1%, from last year. These numbers suggest factories are absorbing a huge amount of inflation, something really not welcome on their balance sheets, and something that needs decreasing inventories and increasing exports to help relieve.

In the mean time the Canadian Dollar tries to push lower, but doesn’t have strength to do so. The one Dollar mark and the 0.9750 area don’t look as they could give up too soon, either way, so another range/consolidation period could come very easily.

The new Bank of Canada Governor, Mr. Mark Carney, suggested rates will be hiked when GDP numbers assure a sufficient growth rate; well, probably not too soon then, and as such we will not expect too much from the Cad, either way.

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Fundies and Trading
There is a constant question from some traders as to why anybody would ever need to consider the ‘F’ word when trading. Fundamentals: what is so damaging at looking at both Technical charts and having a Fundamental filter to gauge how many Lots to put on? Why is it that accepting that Technicals give us price points to trade, but Fundamentals determine the direction that we travel is so difficult for some traders to accept? Without a Fundamental Filter very few pure Technical traders would have seen this Dollar move coming today.

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