Commodities and Loonies: CAD strong because of ZIRP

by royalarse13

Listening to @randycass on BNN and he makes the case that CAD is overvalued since it’s fundamentally a commodity-driven currency. As GDP in Asia and Europe languish the CAD should weaken alongside a basket of hard and soft raw goods.

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The fundamental case is sound, CAD correlates positively with various commodities.   This argument alone ignores broader characteristics of the currency; its stale, incomplete and unsatisfying like the online dating profile of an overweight cougar. (Thanks to @David_Stendahl  for this excellent collection of CAD correlation charts).

Investing in sovereign credits are, especially in Canadian government bonds at 10yr hits All-Time-Low Yields, all about the manipulation of interest rates by central banks and the distortion of prices of all debt instruments.

Since the pool of capital (money supply) is increasing globally and being distributed from CBs to Global Mega Banks, it needs to be ‘stored’. As such cash seeks the comfort of Canadian government bonds: AAA, liquid, relatively high-yielding and secure credit instruments that can be reliably bought and sold in large quantities.

This has keep the CAD strong during the on-going, cyclical weakness in Asian commodity-demand. I expect this effect to be transient as China is widely believed to be planning another large stimulus packages. (Lets put this $3 Trillion to work, eh?) If this is announced before the presidential election I believe the market will rally strongly until the outcome of BARRY vs. MITT is known.

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