Canada Markets

Can the Canadian Dollar Complete a V-Shaped Recovery?

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
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The Canadian dollar stalled at resistance of $.7980 CAD/USD on Tuesday, the 67% retracement of the move from spot dollar's January high to March low. This move was realized despite investors holding a bearish net-short position for three consecutive weeks ending April 10 (second study). (DTN graphic by Cliff Jamieson)

We last looked at the Canadian dollar on March 19, a day when the loonie reached its lowest level seen since June 2017. Since the $.76359 CAD/USD low was reached that session, the Canadian dollar has strengthened 335 basis points, or 4.5%, to Tuesday's high of $.7979, a level that points to a test of resistance. This move was despite CFTC data that shows noncommercial traders or speculators holding a net-short position over the past three weeks ending April 10.

This is the first bearish position held in the Canadian dollar since July 2017. The question asked is whether the loonie has the legs for a full v-shaped recovery to the January high of $.81499 CAD/USD, a chart pattern that is simply shown by a sharp decline that is followed by a sharp move higher back to the recent high.

The Canadian dollar moved seven basis points higher to $.79656 CAD/USD on Tuesday, reaching its highest level seen in more than two months. The move resulted in a test of retracement resistance, which led to a close near the middle of the session's trading range.

Resistance lies at $.79803 CAD/USD, the 67% retracement of the move from the spot dollar's January high to March low. A sustained move above this level could result in a test of the February high at $.80065 CAD/USD, and then could return to a test of the January high of $.81499 CAD/USD.

Potential support may lie at $.78741 CAD/USD, the lower-end of the bullish gap formed in April 10 trade.

The five-year seasonal index chart suggests that the Canadian dollar tends to reach a seasonal high in late April and tends to drift lower into June.

While some support may exist from encouraging statements made on the current North American Free Trade Agreement negotiations, a number of concerns lie ahead. A few of these include:

-- The Bank of Canada will release its April rate decision on Wednesday. While traders will be closely watching the text supporting this decision, it is widely believed that a rate hike will not be announced this month.

-- The International Monetary fund downgraded its estimate for Canada's GDP growth for 2018 by .2% to 2.1%, down from an estimated 3% in 2017. Meanwhile, global growth was estimated at 3.8%, the strongest seen since 2011. Canada's economy continues to struggle. At the same time, today's report from the IMF pointed to "waning support from global integration," while pointing to the dangers of protectionism to the global economy.

-- Reports on Tuesday show an initial ruling from the World Trade Organization that favors Brazil in a challenge over subsidies paid to Bombardier in its production of the CSeries airliner.

-- Canada's constitutional crisis resulting from a British Columbia challenge against an Alberta pipeline to tide water continues to harm the country's resource economy and outside investment.

-- CP Rail is on the verge of a potential strike as early as April 21, which would have further negative consequences for the Canadian economy at a time when CP states demand is "soaring."

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