Tourists from the United States have long enjoyed trips to Canada in search of vacation and shopping bargains. Recently, however, the Canadian dollar has moved to parity against the U.S. dollar threatening to overtake it in value. Fueled by the strength in the commodities market such as uranium and oil, the loonie, as the Canadian dollar is affectionately called, now commands new respect. What does this mean for U.S. traders in the foreign exchange (FOREX) market?
What Is Parity?
Parity occurs when the basic denomination of the currency of one country is equivalent to that of another. For example, without regard to brokers' fees, if you attempt to convert one dollar of American money in Canada, you will now receive one Canadian dollar in return. Until quite recently, you would have received one Canadian dollar plus some Canadian coins, representing the higher valuation of the U.S. dollar over the Canadian dollar. Times have changed. As the U.S. dollar continues to erode, the Canadian dollar has finally caught up for the first time in about 30 years.
Opportunity or Disaster?
Whether this new set of financial circumstances between the Canadian loonie and the American greenback represents opportunity or disaster most certainly depends on whose perspective you are viewing it from. Canadians will now be looking south to make cross-border purchases, since enjoying this new found value in their currency. American tourists will no doubt limit their trips to Canada in order to search out lower prices, which is an unfortunate in light of the relative proximity of the Christmas season. Manufacturers in the USA will start seeing their products increase in export sales to Canada, the largest U.S. trading partner. But, what if you are a U.S. trader in the FOREX market? Is there a dismal outlook for you?
No Need to Fear
The nature of foreign exchange is such that U.S. traders will not be severely impacted, if at all. The reason for this is that the very thing that makes the FOREX so potentially profitable is the volatility itself. Whether from the USA or any other country, you make money in the FOREX by taking trading positions based on your belief that the market will be moving either direction, up or down. As long as there is movement, there is money to be made. So the real concern is not whether a specific currency will become stronger against another particular currency, but whether you have taken the right position with respect to the change in valuation. Therefore, if you, as a trader, conclude that the U.S. dollar will continue to weaken against the Canadian dollar, then you may want to ride the trend and go short on the USD/CAD pair when you trade. Of course, part of the trick will be trying to determine how long the trend will continue. Without getting too comfortable in the trend, perhaps you can just enjoy it while it lasts as you limit or eliminate your spending north of the border.
Sandy Robinson, J.D., Copyright 2007
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If you are ready to change your future by stepping into the exciting world of trading FOREX, go to http://www.winningtradersassociation.com for more information. Author Sandy Robinson, J.D. is part of the Winning Traders Association, an educational organization founded by John Beiler, President. The organization consists of a network of committed trainers and motivated traders willing to provide support to those interested in trading foreign exchange. Many of the members work from home.
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