Canada Markets

CAD Consolidates, Nearing a Period of Weakness

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
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The spot Canadian dollar closed higher against the USD for a second day, while still falling short of a test of last week's high and consolidating within a pennant chart pattern. The lower study shows investors holding a bullish net-long futures position for a third straight week as of Jan. 4, although the size of this position has been pared. (DTN ProphetX chart)

The Canadian dollar closed marginally higher on Wednesday, up 16 basis points to $0.7876 CAD/USD. This may be viewed as a surprise move, given weakness in crude oil and strength seen in today's U.S. dollar index in Wednesday's session. One year ago, the loonie closed at $0.7665 CAD/USD, while the five-year average for this date is $0.7559 CAD/USD.

As seen on the attached chart, the spot Canadian dollar trade is hovering over the 67% retracement of the move from the September 2017 high to the March 2020 low, calculated at $0.779759 CAD/USD, after closing above this level in five of the past six weeks, although is showing signs of a struggle gaining traction at this level.

As seen on the spot Canadian dollar chart, this week's highs have fallen short of testing last week's high of $0.789578 CAD/USD, while forming a pennant consolidation pattern on the chart, with resistance seen at $0.7902 CAD/USD, the upper blue line of the pattern.

The lower study shows the most recent CFTC data for the week ending Jan. 4 showing investors holding a bullish net-long futures position for a third straight week, the longest bullish stretch seen since March 2020, although the size of this position was pared, pointing to a weakening resolve as trade nears the $0.79-cent level.

There's a number of supportive features being reported for this exchange rate, including the Biden win and the recent surge in crude oil prices. At the same time, the first half of the year is not friendly for the Canadian dollar, which will make the eventual break from the current consolidation pattern worth watching.

In four of the past five years, the Canadian dollar turned lower from a January high. In 2020, the Canadian dollar reached an early calendar year high on Jan. 6, while reaching a high on Jan. 31 in 2017, 2018 and 2019. In 2016, this high was reached on April 29.

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