The Canadian Dollar is no longer just a commodity currency tied to the up and down price of oil.

Instead it seems to be gaining new found respect as a "safe" currency into which central banks are more keen to diversify into, while moving away from the USD and EUR which are facing debt concerns.

From Bloomberg: "The share of global currency reserves in a category that includes Canada and Australia dollars now exceeds that held in pounds and yen, according to the International Monetary Fund.

"Asian central banks are very keen to buy alternative currencies, and the Australian and Canadian dollars have reached a point now where they are major, big-hitting currency pairs," Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London, said in an interview last week. "The dollar is slowly but surely losing its status as the world's reserve currency.""

We can see this move into Canadian securities in the flow of international capital to the country's bond markets that it reports in its International Securities Purchases monthly release.

"Statistics Canada in Ottawa said last week that net securities purchases by investors outside the country totaled C$15.4 billion ($16.1 billion) in May, the most in a year. Net inflows into the so-called loonie, named for the aquatic bird on the nation's dollar coin, were higher last week than the past year's average, according to Bank of New York Mellon, the world's largest custodial bank, with more than $20 trillion in assets under administration."

The banking sector in Canada managed to avoid the worst of the recession, and the government is working to eliminate the deficit in the country by 2013. In a land of sovereign debt concerns, its very reassuring to investors that a country does not have to borrow in order to finance its operations.

USD/CAD Gains Even as Risk Aversion Rules the Day:

As we can see from the above image, even on a day when other riskier currencies are suffering declines (AUD for instance) and oil prices are down on the day from the fear of the fallout of a US default, the CAD is much stronger, paring its losses from Friday when CPI came in softer than expected.

The turnaround did not come at the start of the week, but moreso during the European session, and if this momentum continues the pair should close the rest of the gap between current price and the lows we set last week near  0.9425.

A break of those lows from last week opens up the door to further gains by the CAD against the USD, with our lows from 2007 at 0.9055 a possible downward target.

AUD/CAD Moves in Favor of Loonie

Just to drive this point home, if we look at the AUD/USD pair in the 1 hour timeframe we see that the overnight action clearly favors the CAD, as it erases its losses from Friday (post CPI). We have further room to fall if the momentum here holds, though we come across the 200 ema (in gray) soon at the 1.0240 level.

Now, the Bloomberg article also talks about the Australian Dollar being used as a way for central banks to diversify away from the USD and EUR, but we did a breakdown of the 2 currencies recently in which we came to the conclusion that because of the RBA current "wait and see" mode regarding interest rates is more dovish than what we heard from the BOC which seems ready to lift rates later this year, the fundamental bias between the 2 favors the CAD.

You can see that article here: With RBA and BOC Diverging, Can This Present an Opportunity to Short AUD/CAD?

We continue to favor the CAD here and we can move beyond just looking at oil prices to determine where the Loonie may go next...

Nick Nasad
Chief Market Analyst