Canadian Dollar vs Crude price correlation is about to break.
What does that mean to traders who want to position long Cad futures or short USDCAD spot forex and why?
Simply put and contrary to common and currently prevailing popular belief there is more to Canada’s GDP. It is not just oil. In fact, oil prices and the oil service sector is only a fairly small part of the entire GDP picture.
What matters to me is that in the past few months we witnessed a massive foreign purchasing of Canadian securities, many of them resource based. So who are the foreigners pouring billions into buying Canadian resource based companies at the moment and why are they doing it? Simply put, Canadian resource sector is trading at 85% discount at the moment if you account the Cad valuation near all time low and oil at near all time low if priced in with inflation. And who are the foreign investors? Well, they are not the mom and pop who are gambling on penny stocks hoping to buy a new RV to go south. We are talking the financial elite here, fund managers looking for rare value buying in a stable country at deep discounts.
And if I am correct, what does that mean? Well, you need $CAD to buy Canadian securities. That means that one cannot keep on selling Cad if you are actually going to need it to buy stuff. So, regardless of what the crude price falls to this next few months, there is going to be a huge demand for Canadian Dollars to buy up Canadian resource companies at ridiculous cheap valuations.
In my experience, having witnessed Canada’s shame of selling off our resources for years, I know that around March-May 2016 there will be a “sudden” need to pay up the billions of Cad, hence the return to a fairer market valuation of CAD.
It may take another 2-3 months, or days. But the money is already spent, now its time to get the wallet out and actually make the payment in CAD. Gosh, does that mean we need to start accumulating Canadian dollars now?