Chris Gaffney takes a look at key currency movements in The Daily Reckoning. In today’s highlights: Oil weighs on the Canadian loonie… Mexican peso soars on rate hikes… Brazilian real still a speculative investment… Aussie dollar down on weak data… Japanese yen carry trade lives on…

A small rise in the price of oil helped rally the Canadian dollar (CAD) for the first time in seven days. Recently the markets had started to predict a free fall in the price of oil, which put selling pressure on both the Norwegian krone (NOK) and Canadian dollar. But the stabilization in the price of oil had a positive impact on the loonie. I read where Alberta holds the largest crude oil reserves outside the Middle East, so the Canadian dollar will certainly be influenced by energy prices. I don’t expect the Canadian buck to rally much past parity though, as it is heavily reliant on the U.S. economy, which will continue to slow.

The Mexican peso (MXN) was another currency that advanced yesterday. Mexico’s peso advanced to a near six-year high, and is now the second best performing currency YTD, behind the Brazilian real (BRL). The peso has benefited from two interest rate increases by the central bank since June, widening the gap between the Mexican and U.S. benchmark lending rates to 6%, the most in almost three years. And with the central bank raising their inflation forecast through 2010, there is a good chance of another rate increase in August. With another rate increase, we will likely see the peso trade below 10 pesos/dollar.

As I mentioned above, the Brazilian real continues to be the best performing currency versus the U.S. dollar this year. With untold riches of commodities, and a more stable political situation than in the past, Brazil continues to attract investors. But investors should continue to look at the Brazilian real as a speculative investment; it shouldn’t be seen as a core currency holding. We offer a 3-month CD in real at an APY of 6.4%, with a $20,000 minimum investment. Also, due to the speculative nature of this currency, investors have to complete an emerging markets risk disclosure prior to investing.

Some bad news out of Australia caused the Aussie dollar (AUD) to fall to a six-week low. A government report showed that retail sales dropped the most in six years, adding to signs that the economy is slowing. The currency markets are now predicting that the Reserve Bank of Australia may now cut rates this year instead of next. A housing recession similar to those of the United States and United Kingdom is also putting pressure on the Aussie dollar. On the positive side, the Australian government said the trade balance turned to a surplus in June after coal and meat exports jumped. I continue to believe that commodity demand will pull the Australian economy through their housing slowdown, with the currency actually rallying by the end of the year.

Japanese investors also continue to support the Aussie dollar and kiwi (NZD). The Japanese bought record amounts of Australian and New Zealand dollars on the Tokyo Financial Exchange yesterday, as gains in the yen (JPY) made the higher-yielding currencies cheaper. So the carry trade lives on! The Bank of Japan is expected to keep rates on hold, as Japan’s economy heads for a ’soft landing’. In its annual evaluation of the Japanese economy, the IMF forecast economic growth of 1.5% this year, a pace that is slightly below the economy’s potential. The report said the Bank of Japan’s ‘wait and see’ approach to monetary policy was appropriate. With the BOJ keeping rates down, the carry trade will continue.

Source: Don’t Be Fooled by the U.S. GDP