Drozd: Canadian dollar falls to an 11-year low

There are advantages and disadvantages for agriculture

The Canadian dollar continues to erode on the heels of falling commodity prices. A year ago, the Canadian dollar was 86 cents against the American dollar. Today it is closer to 72 cents U.S.

The weakness in crude oil and gold have contributed to the collapse of the loonie. Canada is a country rich in resources, so when the metal and energy markets drop, so goes the Canadian dollar.

This weakness may have come as a surprise to some people, but technical analysts were alerted to an impending downturn in July 2014, when a two-month reversal developed on the monthly nearby gold and crude oil futures charts. Since then gold has lost $300 an ounce and crude oil has slipped $70 per barrel. Subsequently, the Canadian dollar has dropped 22 cents U.S., as it continues to establish lower lows and lower highs within a downtrending channel. This is illustrated in the accompanying long-term chart.

Downtrending channel

In a downtrend, the market declines and then reacts, but quickly runs into overhead resistance where an increase in selling turns the market back down. This process, once set in motion, develops a momentum which strengthens the trend and makes it persist.

Market psychology

As a new downtrend begins to emerge, sell orders materialize, but many are at a limit price above the market. In the normal ebb and flow of the market some of this selling is satisfied when prices move up. However, a portion of the selling is not satisfied and when prices again begin to move down, some of these sellers jump in for fear of missing the move.

The balance of unfilled sell orders will continue to trail the market in hopes of catching a reaction. However, most of these sellers will gradually lower their offers as the market declines. Eventually, the decline will accelerate sharply when much of the patience of those waiting for a big break will have worn thin. This results in more selling being thrown into the market at the prevailing price level.

There is an old saying, “The trend is your friend.” When a trend can be identified and followed to its conclusion, it translates into opportunity.

A declining Canadian dollar impacts Canadian agricultural producers. A lower Canadian dollar makes it more expensive to import goods from the United States such as fertilizer, machinery, soybean meal and corn, but there are also some advantages of a lower dollar.

Canadian grain and livestock producers selling to companies in the United States and being paid in U.S. dollars can take advantage of a declining Canadian dollar by waiting to convert those greenbacks to the loonie when the Canadian dollar is lower.

A low Canadian dollar also serves to offset some of the weakness in U.S. grain and livestock futures markets pressured by the strong U.S. dollar. Some individuals are under the impression grain and oilseed prices are higher when the Canadian dollar is low. This is a myth!

Grain prices are higher when the U.S. dollar is low. A weak U.S. dollar makes U.S. exports more competitive in the global market, increasing demand for U.S. commodities, which draws down stocks and increases prices. This recently occurred in 2007-08, an era which experienced record-high grain prices. At that time the U.S. dollar was low and the Canadian dollar was in turn up at par.

A lower Canadian dollar can also help to improve spring wheat basis levels when the exchange rate is incorporated into the basis. This is in part the reason spring wheat prices have been holding relatively steady to slightly lower in the cash market, even though the daily MGEX spring wheat futures contracts are at new lows.

Although many factors influence the price of grain, producers identifying the trend in the Canadian dollar are better able to determine marketing and hedging opportunities for their grain and livestock operations.

Send your questions or comments about this article and chart to [email protected].

About the author

Columnist

David Drozd is president and senior market analyst for Winnipeg-based Ag-Chieve Corporation. The opinions expressed are those of the writer and are solely intended to assist readers with a better understanding of technical analysis. Visit Ag-Chieve online at www.ag-chieve.ca for information about our grain-marketing advisory service and to see our latest grain market analysis.

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