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By Ilya Spivak, Currency Strategist
Fundamental Forecastfor CanadianDollar: Neutral - Canadian Dollar Maintains Strong Correlation to S&P 500
- Speculative Sentiment Hints Canadian Dollar Rally to Continue
- FX Options, Futures Hint Long-Term USDCAD Bias Bullish
The Canadian Dollar remains intimately tied to the trends in market-wide risk sentiment, with prices showing an iron-clad correlation to the S&P 500 benchmark stock index. Looking ahead, this puts the spotlight on the evolution of the EU debt crisis as well as economic data flow out of the US, with the health of the world’s top economy seen as a proxy for the state of the global recovery at large. On the former theme, the tone will be set by the outcome of the weekend’s G-20 finance ministers’ meeting. For the latter, a busy docket of scheduled releases on the economic and corporate earnings calendars awaits.Hopes were running high ahead of the weekendG-20 summit amid rumors that policymakers will be discussing plans for anexpansion of the IMF! 217;s ro le in managing the EU crisis byusing it as a delivery vehicle for assistance from emerging economies including China andBrazil to help relive funding pressures indebt-strapped EU nations. The newswires suggested a final announcement on the scheme would wait until the G-20 heads of state meeting onNovember 3 to account for whatever EU officials produce at theirown sit-down on October 23, but traders were nonetheless hopeful thatsomething supportive would surface. Presumably, such an outcome would numb the pain of preparing European banks for a sovereign default, the true cost of which remains murky. The Bank of International Settlements estimates European lenders hold close to $2.2 trillion in sovereign debt from the so-called “PIIGS” nations. Just asking the banks to mark those assets to current market prices to assess the degree of loss they could potentially take and gauge the cost of recapitalization threatens to set off panic, turning the much-feared ignition of another credit crisis into self-fulfilled prophecy. If emerging-market cash was used to create a large-enough funding cushion for sickly European nations such that immediate sovereign fears were alleviated, the banks may be spared having to take particularly painful steps to recapitalize immediately (like selling off assets en-masse or cutting off lending to the already sputtering economy), which may tip Europe into recession. On the US economic growth side of the sentiment equation, the focus is likely to fall on the Federal Reserve’s Beige Book survey of regional economic conditions, with traders eager for further confirmation of the creeping improvement in the pulse of US dat! a releas es since June. Other business cycle-sensitive releases including Industrial Production, Housing Starts as well as business confidence and manufacturing growth metrics from the Philadelphia and New York Fed branches respectively are also on tap. Finally, the earnings season is moving into high gear, with over one-fifth of the S&P 500 due to report third-quarter results. DailyFX is the forex news and research arm of FXCM, Inc (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.
Original Article: http://www.dailyfx.com/forex/fundamental/forecast/weekly/cad/2011/10/15/Canadian_Dollar_Tied_to_SPX_500_G20_and_US_Growth_Outlook_in_Focus.html
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