Canadian Dollar: End of Month Trading Anomaly
Did you know that the Canadian dollar has a very unique trading
characteristic at the end of every month? According to our statistical
analysis, we found that over the past 10 years, USD/CAD tends to fall
in the last week of the month with a 95 percent confidence level. A
more granular look at the data reveals that this drop is predominately
concentrated around the 24th and 25th day of every month. Interested in
knowing why this happens?
Settlement of Oil Futures
The trading anomaly in USD/CAD stems from the fact that Canada is
one of the world's largest oil producers. Their oil reserves are also
second to only Saudi Arabia. Canada is also the top exporter of oil and
other petroleum products to the United States, making the US
dollar-Canadian dollar exchange rate especially correlated to energy
prices and related money flows.
Therefore it is not surprising that the movement of the Canadian
dollar is especially sensitive to end-of-month oil contract settlement.
It is fairly easy to determine when firms are required to settle
outstanding oil contracts and potentially convert US dollars for
loonies on a monthly basis. More specifically, it is well-known that
oil futures settle in the final week of every month.
Looking at the table below, we see that a 10-year sample of data
shows the biggest appreciation in the Canadian dollar against the US
dollar happening in the final week of every month. In other words, on
average, USDCAD falls 6 points per day in the final week - a result
statistically below 0,at a 95% confidence level. Six points is hardly
worth getting overly excited about since it is difficult to take
advantage of such a small price move on a vague, weekly basis. However
when we take a much more granular look of the USDCAD's behavior around
specific days of the month, the moves become more substantial.
The chart below shows that the Canadian dollar tends to appreciate
the most on the 24th and 25th day of every month, with continued gains
into the early days of the month that follows. This dynamic is exactly
consistent with settlement on oil futures contracts, as the “notice
day” - the first day on which the purchaser may be called upon to take
delivery - is typically between the 22nd and the 24th calendar day.
Taking a look at the NYMEX crude oil schedule through 2007, we see
an interesting connection between the USDCAD and delivery dates.
Namely, it seems as though the Canadian dollar moves the most
following the Notice Day, while the First Delivery Day likewise causes
some strong moves in following month. Given that the Notice Day occurs
today, August 23rd, it is especially interesting to note that the
Canadian dollar has appreciated strongly against yesterday's close.
The chart below shows USDCAD movements through Notice Days from December 2006 to present.
The statistical relationship showed signs of waning through the
early months of the year, but it has clearly picked up from June
through August. Given such a relationship, it seems clear that the
USDCAD stands to continue declines through the short-term - leaving
Loonie appreciation probable in upcoming days of trade.
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