Canada Markets

Canadian Dollar Breaks Through Support

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
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Canada's dollar is under pressure, breaking through a number of support levels in the past two days. The middle-study shows investors moving from a net-short to a net-long position in the dollar for the first time since last September. The lower study shows momentum indicators on the daily chart trending lower while in over-sold-territory. (DTN graphic by Nick Scalise)

Nearly a month ago, this column looked at prospects for the Canadian dollar in a piece titled Can the Canadian Dollar Rally Last? At the time, the Canadian dollar was rallying into its third consecutive week, while the day of the blog the exchange against the U.S. currency had moved above $.83 CAD/USD for the first time since late January. At the time, the technical challenge for the June contract was a breach of $.8374 CAD/USD, the 38.2% retracement of the move from the July 2014 high of $.9332 to the March 18 low of $.7781 CAD/USD.

While trade exceeded this level on two trading days, May 13 and May 14, the daily close on either of those days was below resistance and the exchange has largely been on the defensive since. Today's trade has seen the CAD/USD exchange fall 85 basis points to $.8041 CAD/USD, while moving below the potential support of both the 50-day and 100-day moving averages, while ending lower for the seventh time in eight sessions. Retracement support lines have also been violated in the past two days, with both the 38.2% and the 50% retracement of the move from the March low to the May high broken.

It's interesting to note that after holding a net-short position over the past 33 weeks, investors or non-commercial traders moved from a net-short of 3,982 contracts to a net-long of 4,348 contracts as of the most recent CFTC data as of May 21 (middle-study). Given further technical weakness, it is possible that this group of traders will return to their bearish mind-sets while putting further pressure on the dollar.

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Potential technical support may be found at $.8012 CAD/USD, the 61.8% of the rally from March 18 to the May 14 high, while $.7983 remains the 66.7% retracement of the same rally and may also be a test given further weakness. Below this level, a near double-bottom on the weekly chart is found in the $.7888 to $.7900 range while the March contract low of $.7781 could also be tested. At least one Canadian chartered bank is holding on to their forecast of a low of $.75 this calendar year, while a private firm quoted in the National Post sees a $.69 dollar.

The Canadian dollar continues to face challenges from U.S. dollar strength and declining oil prices, to which movements are closely correlated. A Bloomberg survey of economists suggests that on average, responses would suggest that the Bank of Canada is optimistic in its growth projections for the balance of the year, after pegging first quarter growth at zero. Should the U.S. increase rates this calendar year, further weakness should be expected ahead for the loonie.


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

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