Canada Markets

Canadian Dollar Remains Challenged

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
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The Canadian dollar posted a bearish outside trading bar on the daily chart on Tuesday, amid weak economic news in Canada and weakness in commodity markets. The middle study shows stochastic momentum indicators rolling over, while the histogram in the lower study shows non-commercial traders increasing their net-short position by 36% in the latest CFTC data to hold the largest net-short futures position in eight weeks as of Nov. 26. (DTN graphic by Nick Scalise)

While not shown on the attached chart, the Canadian dollar has slipped lower during each of the past four weeks. Tuesday's economic news, perhaps both home and abroad, will not lead to confidence in the loonie, which could lead to a further push to the downside.

China's purchase manager's index was reported to fall to 49.6, the lowest level in over three years and slightly below expectations as seen in a Bloomberg survey. Continued weakening in this economy is a concern to all commodity exporters, with Farm Credit Canada releasing a recent study concluding that over the past 20 years, GDP growth in foreign countries has played a greater role in Canada's ag exports than has the level of currency exchange.

Weak data was also released in Canada Tuesday, which could act as a red flag for our currency. Canada's GDP for the third quarter of the year ending in September was reported at 2.3%, ending the technical recession due to negative growth in the first two quarters of 2015. Concerns still exist due to the .5% contraction recorded for September, with some pre-report expectations expecting steady to modest growth for this month.

Another warning sign for Canada's economy was seen in a Parliamentary Budget Office report indicating that federal deficits may be billions more than projected in recent Liberal projections. Government projections were viewed as "optimistic", while the PBO suggested that the deficit could be as much as $10.8 billion higher than expected.

As seen on the attached chart, the Canadian dollar faced light selling Tuesday, with today's trade resulting in a bearish outside trading bar on the daily chart, trading both higher and lower than Monday's trading range, while ending lower.

The Canadian dollar continues to struggle above the $.7441 CAD/USD low reached Nov. 23 and the $.7428 CAD/USD low reached Sept. 29, while respecting resistance from the downtrend line in place since the Oct. 15 high, currently found at $.7498 CAD/USD.

The middle study shows the stochastic momentum indicators and indicates the struggle this market faces in sustaining momentum. The last two attempts to rally higher, first in early November then again in late November have both struggled to result in a significant move, with momentum indicators rolling over prior to reaching the mid-point of the neutral area of the chart.

The lower study is a histogram of the net-futures position held by non-commercial traders or investors. Between mid-August and mid-November, investors reduced their net-short futures position or the level of their bearish bets from 67,405 contracts to 17,907 contracts, the lowest level seen in 20 weeks. The past two weeks, however, have resulted in a sharp increase to 38,617 contracts net-short as of Nov. 24, the largest net-short position seen in eight weeks.

One thing to watch is the movement in crude oil. On Dec. 4, OPEC will meet, with increased chatter that Saudi Arabia could maintain current production levels, while Iran could report plans to increase production. Such an event could lead to further pressure on oil prices, which could pull the Canadian dollar lower. Investors are showing increased concern by reducing their net-long position in crude oil to the lowest level in 14 weeks.

Should the Canadian dollar market break below recent lows, the continuous active chart would suggest support could be tested in a range from $.7030 CAD/USD to $.7135 CAD/USD, monthly lows seen in July 2003 and May 2004.

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