Canada Markets

Canadian Dollar Trends Higher Through Resistance

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
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The Canadian dollar has rebounded sharply from its low on March 1, breaking the resistance of its 50-day moving average and also the 38.2% retracement level of its January through March downtrend. This may lead to a move higher to $.9898 CAD/US dollar, its 50% retracement level.

After a 5% drop in the value of the Canadian dollar against the U.S. dollar, taking exchange rates from a January 11 high of $1.0151 CAD/US dollar to a March 1 low of $.9646 CAD/US dollar, the June dollar has moved sharply higher against the U.S. to today's $.9838 CAD/US dollar as seen on the attached chart, up nearly 200 basis points.

Fundamental analysis covering today's market action includes:

-- a positive reaction to a lower-than-expected trade deficit announced in Australia, which is yet another barometer of economic performance of a resourced-based export economy which is similar to that of Canada.

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-- a positive move based on China's March Purchase Manager's Index (PMI) which increased to 55.6 from 54.5 in February. To Canada, this is a sign of increased demand for commodities.

-- U.S. dollar weakness based on a private forecaster's release of data which indicates poorer-than-expected jobs growth taking place in the U.S. in March.

Looking at the attached chart, the Canadian dollar reached an intra-day high of $.9860 CAD/US dollar in each of the past two days, the highest level seen since February 20. Since March 6, the dollar has moved higher following the flatter blue trendline, but has since accelerated its upward move along the steeper blue trendline. Two resistance levels have been broken over the past two days. First is the contract's 50-day moving average at $.9833, which was breached in yesterday's trade. Secondly, the 38.2% Fibonacci retracement of the January high to the March low was breached, which is at $.9839 CAD/US dollar. A permanent close above this level would set up the possibility of a test of the 50% retracement at $.9898 CAD/US dollar.

Weekly stochastic indicators (not shown) indicate strong upward momentum, with indicators in neutral territory and trending higher. These indicators also show a bullish cross-over of the stochastic indicators taking place in early March while in over-sold territory, which is also viewed as a sign of a move higher.

The free internet site equityclock.com, which charts seasonal trends for a number of commodities, currencies and financial instruments, indicates that the Canadian dollar's 20-year seasonal tendency (1990 to 2009) is for an approximate 2% gain from April 1 until June 1, which would lead to a move close to par in upcoming weeks.

One caveat in this analysis is the impact of falling crude prices on the Canadian dollar. May crude oil began a short-term trend higher in the early days of March, along with the Canadian dollar, while has since reached a short-term high of $97.80/barrel on April 1 and has since corrected sharply lower, including a $2.72/barrel sell-off in today's market, largely due to higher U.S. crude inventories combined with weak economic data. The Canadian dollar's correlation to moves in crude oil prices may act to limit further advances in the dollar.

Cliff Jamieson can be reached at cliff.jamieson@telventdtn.com

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