A New Reason to Buy the Loonie

Confession: I always love to read about the central bank gatherings.

Whether it’s an all-out European Central Bank meeting or just an informal grouping of Fed-Heads, there is ALWAYS interesting currency information you can learn from these meetings.

Plus, it’s fairly easy to get your hands on information about any central bank gathering considering the media types practically falls over each other to report on anything central bankers say (and out-of-the-mainstream writers like myself focus on what they perhaps don’t say).

“Recovery Coming” According to Leading Central Bankers

Just take the most recent gathering of central bankers in Wyoming last week. Federal Reserve Chairman Ben Bernanke hunkered down with central bank governors from Italy, France and Japan.

Their purpose? To figure out how to stop stimulating the economy without slowing the recovery.

After meeting, the Central Bankers and governors seemed to pat themselves on the backs and agree that the global economy was recovering quite nicely. Nothing to worry about…at least according to them.

What does this tell me? Well, frankly, I’m inclined to believe them. Or at least, trade off their beliefs. Why? Well, even if these central bankers are overly optimistic, there are countless traders out there that are willing to follow what they’re saying. As a Forex trader, you have to follow what the herd is doing or you’ll get trampled.

Again, as I said, there are always interesting tidbits to take from these meetings. As you can see, the Wyoming meeting was no exception. They basically told us to trade as if the global recovery is already underway.

Overall, it’s the very reason I’m betting on the Canadian dollar. Let me explain…

Who’s Currency Will Benefit Here?

If you’re looking at the global economy in terms of a global recovery, then you have to consider which currencies will benefit and suffer from a recovery.

First and foremost, the U.S. dollar and the yen will be the primary currencies that get hurt (in the long run, even though the buck could get a short- term bump up in the near-term).

Meanwhile, any global recovery will mean that nations around the world will start buying oil again. That will push up prices, and a few key commodity currencies including the Canadian dollar.

I believe that you will see USD/CAD suffer from the “fall of the dollar” and from the “rise of oil.” Therefore, those that are short the USD/CAD pair over the coming weeks to months should benefit from these fundamental forces in play.

Short USD/CAD & Watch the Profits Roll In…

As economies expand, money will pour out of the defensive posture that pushed up the dollar and yen last year. That will shove up a handful of riskier currencies that have more upside potential in an expanding economy.

Bottom line: Watch for the Canadian dollar to rise and the greenback and the yen to “fall off” in the weeks ahead, as investors wrap their head around the idea of a recovery.

Happy Trading!
Sean Hyman, Professor FX

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