A.G. EDWARDS & SONS, INC.
One North Jefferson, St. Louis, Missouri
31-955-3050
(January 31, 2002) CURRENCIES: The Canadian Dollar has declined to new lows recently, with little news to account for the decline. In this article, we will examine the overall trend in the financial capital flows between Canada and the U.S. and show that these trends signal continued weakness in the currency.
Canadian Dollar And Portfolio Flows
Chart courtesy of A.G. Edwards.
This chart shows a scatter gram of total equity and debt flows, on a cumulative basis, between the U.S. and Canada, along with the Canadian Dollar exchange rate. We priced the exchange rate in terms of Canadian Dollars per U.S. Dollar, so the larger the number the weaker the Canadian Dollar. The current flow is nearly $95.0 bn, which suggests a weaker Canadian Dollar. Over the past 13 years, more money has moved from Canada to the U.S.
Canadian Dollar Model
Chart courtesy of A.G. Edwards.
This chart shows a model of the Canadian Dollar, using cumulative equity and debt flows. The model forecasts a .6000 Canadian Dollar over the next nine months. Although the Canadian Dollar is undervalued on more traditional measures of value, such as relative inflation rates, Canadian investors prefer to invest in the U.S., and this factor has pressured the currency. Until something happens to reverse this sentiment, the Canadian Dollar will maintain its weaker tone.
Canadian financial authorities have been threatening to intervene to support the Canadian Dollar. Given our research, we believe that if the Bank of Canada intervenes, it will offer a good opportunity to enter outright short positions the Canadian Dollar. To establish a position, we recommend buying the June 6200 Canadian Dollar put, entering the trade at 60 (ob) risking the premium, with an objective of 250.
Bill O'Grady
www.agedwards.com