Canadian currency

For the first time since August, the Canadian dollar is worth less than a US dollar.

The 1:1 ratio is a psychological benchmark used by most people with respect to the dollar. This is actually arbitrary in light of the fact that the currency could be scaled 1:100 and be called the “Canadian Wazoo” which trades at 572 to 1 US dollar and then such comparisons would no longer be used. Both are equally invalid.

Swiss Francs to Euro

The following is a fairly telling chart – the Swiss National Bank is holding the line at a 1.2:1 exchange rate between the Swiss Franc to Euro (i.e. the SWB is not allowing their currency to strengthen relative to the Euro):

The question of the day for all traders is: Will the Swiss Bank relent? They have an infinite amount of Swiss Francs to sell into the market for Euros, but will they want the world to hold their currency while they hold onto (presumably more) risky Euro currency?

The geopolitical premium

Oil has been rising steadily over the past month:

This is, in large part, due to the geopolitical premium that has built up in the commodity on fears of supply disruption from a potential strike on Iran from Israel. Other commodities have been roughly flat, with the notable exception of Natural Gas crashing through the floor:

Until we start seeing more consolidation and shutdowns of natural gas drillers and producers, this supply-demand picture is not going to be changing anytime soon. Big fish such as Encana (TSX: ECA) look cheap, but until we start seeing liquidations of smaller players or spontaneous construction of significant amounts of natural gas burning facilities, I would not be touching natural gas commodities. Notably in the peak of the last economic crisis, natural gas went down to US$2.5/mmBtu and at that level it would bankrupt most leveraged small producers. Larger companies like Encana just need to wait with a pile of cash and mop up when the time is right.

As for the oil markets, it will remain volatile as traders are seemingly using it as a proxy for geopolitical event risk.

Weakness in commodities

I have been doing some further analysis on micro-cap Canadian stocks, but I notice on the side that the weakness in commodity markets must be getting a lot of asset players concerned – leveraging on the way up made people look like geniuses, but did too many people join the bandwagon on the long trade?

Commodity markets have always been prone to huge booms and busts, and this one is not going to be too different – whether the “bust” will be the existing 15% correction we have seen, or whether it will be something more deep remains to be seen. The more people that had or have conviction that the present correction is simply an aberration on a longer trend, the more likely it is that the markets will continue to take these people into loss positions. The market might not be tasting blood quite yet, but a whiff of it is in the air.

My portfolio positioning continues to be extremely defensive and with little linkage with the performance of oil and gold. This exposure might increase if the market is tasting blood, but this is not going to happen until I start seeing different psychology than what is out there today with commodities.

The lowest risk commodity appears to be natural gas, simply by the virtue of not having had a run-up like the others.

The beginning of the end of the commodity rush?

I’ve been slowly trying to get back into the rhythm of the marketplace and then hopefully I will be able to continue researching some opportunities. Nothing looks promising so far, and this quarter has been turning out to be a very low transaction period.

It seems like when Osama Bin Laden got shot, that it also took out the wind of the commodity market. High-risers, especially silver, got pummeled this week:

Who wants to be the person admitting that they bought Silver at $50 an ounce?

Anecdotally, I was walking down the street a week ago and remember these two people walking out of a currency exchange store, and they were clearly holding silver coins as they exited the place. Maybe I should have taken this as some sort of contrarian signal and short the commodity, but I was too busy with other matters to do so.

Also, it is my opinion that the indexes appear like they will be treading water and not exhibiting the run-up that they were doing between September 2010 and February 2011.