The Loonie, Margin Debt And Gold

The week began quite calmly for the loonie. However, a rebound in prices for oil and other commodities that occurred around Wednesday helped drive our dollar up 100 basis points on the week. We should have a better understanding of the situation with the data to be released this week, especially with meetings by the ECB and the Fed and employment figures to be released in the U.S. Do not hesitate to contact your trader to place an order, since more volatility is surely just around the corner. Have a good week.

The Loonie
Courage is a special kind of knowledge: the knowledge of how to fear what ought to be feared and how not to fear what ought not to be feared. - David Ben-Gurion

Recent volatility in financial markets has once again called the sustainability of the recent rally in equities into question. Having discussed recent accumulation of margin debt by institutional players on February 11, 2013, we would like to revisit the subject, as we were once again reminded of how fragile the state of recent optimism really is.
As the graph above illustrates, the level of margin debt has continued to climb higher despite the recent sell off in commodities and equity markets. With the amount of leverage being used by NYSE members hovering around its all time highs and S&P 500 trading above the level seen back in 2007, it is worthwhile to bring up the recent activity in the price of gold to better understand the potential implications for USD/CAD. As evident by the chart, nominal amount of margin debt has historically increased as money supply expanded. This has also been reflected in the price of gold, which has gradually appreciated over the course of 15 years, and until two weeks ago was a beacon of hope for those looking to diversify away from conventional paper currency. While the drop in price did scare away potential buyers in the commodity sector, the change in sentiment has yet to be fully priced in the USD (as far as the USD/CAD activity is concerned). Depending on if or when the convergence materializes, possible outcomes can result in either higher gold prices or lower margin levels. As far as Canadian economic fundamentals go, it is more likely we see the latter. Since margin levels had, historically, a negative correlation with the loonie, caution remains to be the main word of advice for USD buyers.

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