The focus in currency markets is on interest rate differentials rather than the prospects for economic growth.
That's what the rallies Thursday morning in the December
contract (ECZ2:CME) and the
(BPZ2:CME) indicated after both the European Central Bank and the Bank of England decided not to jump on the
rate-cutting bandwagon. Instead, they held rates steady at 3.25% and 4%, respectively.
The rallies came despite unimpressive economic growth in Europe and the U.K. The economies in the 12 countries using the euro grew just 0.4% in the first and second quarters.
The U.K. economy did slightly better, growing 1.2% the first half of the year. The Fed's rate cut to 1.25% Wednesday is likely to enhance the 3.1% pace of U.S. gross domestic product growth.
Currency traders seem indifferent to the notion that better U.S. growth might benefit the buck, and they continued whacking the December
(DXZ2) to within small change of a contract low, a move I
suggested last week would happen with any rate cut.
But we only have to look to our northern border for a currency play where both a higher interest rate differential and a rosier economic growth outlook are available. Canada topped the G-7 major industrialized economies with an average 5.2% growth pace in the first half of 2002. Canada's key overnight rate is 2.75%, now 1.5% higher than what's available in the U.S.
The Bank of Canada is also in a tightening mode, having already hiked rates three times this year. And while the BOC doesn't include a policy bias as the Fed does, the text accompanying monetary policy changes suggest rate hikes are still expected in the future.
Higher rates, coupled with the strongest growth picture among G-7 members, are likely to attract institutions into Canadian debt and currency markets. Canada should also benefit from the Fed's rate cut, since more than 40% of its export trade is tied to the U.S. Any pickup in U.S. growth will help Canada's economy.
Technically, the December
(CDZ2:CME) has been demonstrating nascent momentum off higher lows by registering a critical mass of at least five -- the following chart shows seven -- gaps, laps or expansion bars within the past month.
The Canadian dollar is also triggering a pullback from a high setup in Thursday's session. Sloppiness at the current three-month high suggests this market might come in a bit more before re-asserting momentum.
But Fibonacci clusters at $0.6380 and $0.6362 should provide defined-risk support to test the theory that the Canadian dollar will benefit from higher rates and better growth prospects than are available
almost anywhere but Australia.
(GCZ2:COMEX) triggered out of a pullback from a three-week high. As a "commodity currency," the Canadian dollar will also benefit from an advance in gold prices.
Elsewhere, March 2003
(SBH3:NYBOT) is pulling back after a nine-day rally. Tight, symmetrical support resides at $7.27 to $7.30. The next level lower resides at $7.17 for traders looking to enter this momentum market on a dip.
Marc Dupee is an independent trader and co-author of the book
The Best: Conversations With Top Traders. Dupee was formerly markets analyst and futures editor for TradingMarkets Financial Group. At time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he invites you to send your feedback to
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