Canada Markets

Canadian Dollar Shows Signs of Weakness

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
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The Canadian dollar has lost over 1 cent this week against the USD, reaching its weakest trade in four weeks. The spot dollar has moved below the support of its 20-day and 50-day moving averages, while also breaking below trendline support. The histogram bars on the lower study show the noncommercial net-short position increasing to its largest level seen in seven weeks as of Oct. 20. (DTN ProphetX chart)

The Canadian dollar has traded mostly sideways over the past two months, ranging from a $0.7456 CAD/USD low to a $0.7631 CAD/USD high, or a 175-basis-point range, while the tides are turning for the Canadian dollar/United States dollar pair.

The first sign of this was last week's CFTC data that showed the noncommercial net-short position in Canadian dollar futures increasing by 40.6% to 19,075 contracts as of Oct. 20, the first increase in three weeks and the largest net-short position seen in seven weeks. This is shown by the blue histogram bars in the lower study of the attached chart.

Losses over the four days of this week's trade total 104 basis points. The move has resulted in the breach of the spot dollar's 20-day moving average and 50-day moving average, along with trendline support drawn from the March low. Thursday's session saw trade below the spot dollar's 100-day moving average for the first time since June 1, or almost five months, while also dipping below $0.75 for the first time this month.

Potential chart support is seen at the Sept. 29 low of $0.7456 CAD/USD, while the 33% retracement of the March low to September high at $0.7410 CAD/USD may prove to be the next target should the lower end of the range be taken out. At the same time, fundamental analysis theory indicates the possibility of a move in the direction of a channel breakout by an amount equal to the depth of the channel; in this case, this would reflect the channel low of $0.7456 less the 175 point width of the channel or a potential low of $0.7281 CAD/USD. This would represent almost a 50% retracement of the March through October uptrend.

The Financial Post ran an interesting piece this week on Canada's currency, based on a study by RBC. Their research shows that due the Bank of Canada's neutral stance on interest rates, we have seen the central bank's policy play a lesser role in the movement of the dollar, while the correlation between the loonie and commodities such as crude oil has eroded. The loonie is seen more closely tied with the fortunes of the global equity trade. The Canadian dollar's correlation to the MSCI World Index is reported at 84%, close to double its correlation early in the year.

As a result, the study shows that as investors "look at the world from a 'risk on/risk off' standpoint," equity markets are viewed as the "main proxy for risk sentiment." Given the high correlation seen for the Canadian dollar, it is destined to go for the ride.

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