I just spent five days in lovely Vancouver, British Columbia. I was there with my best pal and business partner Christopher Castroviejo lecturing at an investment conference.

As with every trip north of the border, I find the Canadians to be an extremely warm and friendly group of people. And Vancouver is an especially cosmopolitan city, with a broad and deep diversity of inhabitants from various ethnic and national backgrounds. I had world class French, Italian and Japanese meals all within walking distance of the hotel.

Those friendly Canadians also have a strong sense of national pride (as well they should). The most frequently asked question at the conference was whether we thought the Canadian dollar would not only get back to parity with its U.S. counterpart, but whether it would eventually grow to 1.50 or 2.00 Loonies per American Greenback.

The world of currency exchange is fascinating and the possibilities are almost endless; however, I don’t see any way the Looney/Greenback relationship will get that far out of kilter.

Sure, the U.S. central bankers have been promising, printing and spending dollars like a bunch of drunken sailors on shore leave. But practically all of the other central banks have been doing the same to some degree. The real issue that will moderate the Canadian/U.S. exchange rates is the amount of trade done between the two countries. A whopping 85+% of Canadian exports go to the U.S. It is hard to imagine a currency swing to 1.50 Loonies per Greenback; the Canadian dependence on the U.S. as a trading partner just won’t allow it.

That being said, some interesting things are happening in the world of currencies. The persistent strength of a broad spectrum of currencies against the U.S. dollar has put the Euro currency and others in an overbought position that is likely to be relieved, at least in the short to intermediate term. In the last year, the Euro has only been “classically overbought” versus the dollar a couple of times, as seen below.

Within days of becoming overbought, the Euro retreated significantly in both December and March. This trek into overbought most likely will yield another pullback. One other thing is clear: when the stock market is hitting periods of fear, the world flocks to the safety of the U.S. dollar. In the chart below, we see that when the stock market has hit its low points (in November of ‘08 and March of ‘09), the Euro approaches it lows as cash retreats to the dollar.

If the stock market remains strong for a few days (or weeks) longer, then count on the Euro remaining strong as well. But when the market retreats, look for the Euro to give back some of these gains; this correlations will stay in effect until the cycle is broken by some macro event.

And while we’re on the topic of currencies, here’s an interesting comparison of the percentage moves of the some major currencies to the S&P 500 since the market top in October 2007.

As you can see, the Yen has been the strongest currency by far, with the British Pound lagging. The Yen is clearly the least correlated of the four currencies in the chart, showing that its relationship to the dollar is unique in the current climate.

What conclusions can we draw from these studies? First, there is not yet a real mandate (in terms of price action) indicating that the profligate spending of the U.S. will push the dollar’s value down from now on. The more likely scenario is that the dollar will gain strength whenever fear comes back into the market. In the much longer term, the unprecedented printing of capital will certainly erode the value of the dollar; but for the short to intermediate term, other market and psychological factors continue to play a strong role.

Great Trading!
D. R.