Dollar Bloc Advances

The dollar-bloc is lead the move against the dollar. The easing of some anxiety around Japan's nuclear crisis and firmer commodity and equity prices are helping to lift the Canadian dollar and antipodean currencies.

We had noted recently that the Canadian dollar's correlation with oil prices and the S&P 500 had broken down. The Canadian dollar's correlation with the price of oil had actually become inverted in the first half of March, but now has swung back to slightly positive (r2= 0.11). The recent peak was around Xmas (r2=0.76).

The Canadian dollar correlation with the S&P also broke down from a recent peak (r2=0.78) in early Feb and bottomed earlier this month (with an r2 near 0.47) but has risen since mid-month (now r2 near 0.67).

Again our correlation work is conducted based on rolling 60-day correlations on percentage change. This work suggests that traditional or intuitive relationships with the Canadian dollar appear to be turning.

The data highlight of the week for Canada is tomorrow's retail sales. It is a January release and the consensus is for around a 1% rise after a monthly average of 0.7% in Q4 10 and 0.5% in Q3 10.

Last week saw the US dollar test its 100-day moving average against the Canadian dollar. It comes in now near CAD0.9972. Initial support is seen near CAD0.9750 and then CAD0.9700. Over the slightly longer term, there is potential toward CAD0.9500. A proper test on the late 07 low near CAD0.9060 would seem to require bringing forward BOC tightening and pushing out the end of US quantitative easing efforts.

The Australian dollar is a different kettle of fish. It has been chopping back and forth in the fairly clear range of $0.9800 and $1.0200 since last December. It did break out of the range to the downside last week, as the yen surged, but rebounded smartly on the back of the intervention. It has managed to largely shrug off the hike in reserve requirements in China. Some nearby resistance in the Australian dollar is noted in the $1.0060 area, which is where the 20-day moving average is found and then $1.0150-60 last week's high.