Canada Markets

Canadian Dollar Sharply Lower on Rate Cut

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
Connect with Cliff:
The Canadian dollar broke support on Wednesday, trading at its lowest level seen since March 2009, while the weekly stochastic momentum indicators (middle study) continue to drift lower. The lower study indicates that noncommercial traders or investors have become increasingly bearish, increasing their net-short position for the past three weeks to the largest net-short held since late March. (DTN graphic by Nick Scalise).

The Bank of Canada cut Canada's benchmark rate by 1/4 of a percent today, the second cut this year, hinting at the possibility of negative growth in the second quarter of this year which is the technical definition of a recession. Canada's financial analysts were evenly split on whether this would happen today, while remain split over whether the move will lead to the sought-after turnaround in the country's economic activity. Bank of Canada governor Stephen Poloz is suggesting a "puzzling" stall in Canada's exports (excluding oil), while focus remains on the impacts from weak global growth along with low commodity values.

Canada's current weak dollar continues to fall short of generating a rebound in exports which would normally be expected. Perhaps even more troubling is a sharp reduction in business investment, with Poloz suggesting that Canada's oil patch investment will fall by 40% in 2015, making future recovery increasingly difficult to attain.

Today's weak data also included a further cut to the country's annual growth expectation, with annual GDP growth pegged at 1.1%, down 42% from the previous estimate of 1.9%. An increase to 2.5% is expected in each of the next two years. The Bank of Canada is expecting the Canadian economy to fire on all cylinders and reach full capacity by the first half of 2017.

Today's release had a negative impact on Canada's currency, falling more than 1 cent against the U.S. dollar to $.7735 CAD/USD at the time of writing on the electronic trade (September future), down 104 basis points. As seen on the attached continuous chart, the loonie has dropped below support today to reach the lowest level since March 2009. First of all, the loonie's exchange rate against the U.S. dollar fell below a previous 11-week period ranging from January 29 to April 8, where weekly lows tested support in five of the 11 weeks with the low found at $.7781 CAD/USD. The rate also moved below the 66.7% retracement of the move from the long-term January 2002 low of $.6186 CAD/USD to the November 2007 high of $1.1009 CAD/USD.

P[L1] D[0x0] M[300x250] OOP[F] ADUNIT[] T[]

The middle study shows stochastic indicators on the continuous weekly chart continuing to trend lower while not completely in over-sold territory, suggesting that further downside is possible. The long-term monthly chart (not shown) shows these same indicators on a long-term downtrend since March 2011 with momentum indicators turning higher in 2012, 2014 and again in 2015 although have failed to break above the downtrend line in more than four years.

The histogram in the lower study tracks the net long/short position of noncommercial traders as reported by weekly Commodity Futures Trading Commission data. These investors turned bullish in May, but this lasted only two weeks. This group has remained bearish over the past five weeks ending July 8, with a bearish net-short position of 32,268 contracts held, the largest net-short held since late March. Since March 2013, the largest net-short held has been 39,030 contracts which was reported for March 11 2015 and is in sight of the current level of bearish bets placed against the Canadian dollar.

Should the dollar remain under support levels discussed, there's both technical and fundamental reasons why further weakness may be expected. A look at equity clock.com suggests that the Canadian dollar tends to lose strength over the final six months of the year, using 20-year data to December 2014. On average, the Canadian dollar tends to lose ground in four of the final six months of the calendar year for a slight net loss.

Other factors include: 1) recent strength of the U.S. dollar given Euro weakness tied to the Greek financial crisis; 2) ongoing weakness in the crude oil market, which is dragging Canada's currency lower, with the latest deal with Iran set to add further supplies to the world market; 3) a further divergence between Canada's currency and the U.S. dollar will take place if and when U.S. interest rates are increased; and 4) continued global weakness. China's GDP was reduced to 7%, although was higher than expected. Turmoil in the European Union, centering on Greece's financial ruin, may have long-term impacts on the future of the EU.

Potential technical support for the Canadian dollar given the long-term weekly charts lies at a monthly low of $.7660 CAD/USD seen in March 2009, then again at $.7135 CAD/USD seen in May 2005. The lowest known forecast for the Canadian dollar is $.70 CAD/USD which was released in recent weeks by a U.S. bank, welcome news for Canada's grain exports.


DTN 360 Poll

This week's poll asks whether you feel provincial government crop ratings are accurately reflecting the conditions on your farm. You can weigh in on our weekly poll found at the lower right of the DTN Home Page.

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

Follow Cliff Jamieson on Twitter @CliffJamieson

(ES)

P[] D[728x170] M[320x75] OOP[F] ADUNIT[] T[]
P[L2] D[728x90] M[320x50] OOP[F] ADUNIT[] T[]

Comments

To comment, please Log In or Join our Community .