Canada Markets

Has the Canadian Dollar Run out of Steam?

By Cliff Jamieson , Canadian Grains Analyst
After reaching a high on Friday following nine consecutive weeks of trending higher, the Canadian dollar has slumped three out of four sessions while losing close to a full cent in Wednesday's trade. Wednesday's close is nearing a test of trendline support, in place since Jan. 20. The lower study indicates a histogram of the investor position in the Canadian dollar futures as of March 15, with the net-short position falling for seven consecutive weeks to the smallest position held since June 2015. (DTN graphic by Nick Scalise)

As of last week, the Canadian dollar strengthened against its United States counterpart for the ninth consecutive week, which saw the rate on the continuous chart strengthen 13.6% from a low of $.6819 CAD/USD on January 20 to a high Friday of $.7738 CAD/USD. One report indicates that this is only the fifth time in history a 9-week rally has taken place, which saw the exchange rate retrace to the highest level seen since late October.

Since reaching the high on March 18, the loonie has weakened in three of four sessions, while Wednesday's move of almost a full cent lower is the largest one-day drop seen since Dec. 17. Last week's high also fell just short of fully retracing a leg down on the chart which began Oct. 15.

Does the Canadian dollar have further upside potential against the U.S. dollar? Perhaps not for the following reasons:

1) Crude oil also made a sharp move lower Wednesday after reaching its highest level in 14 weeks in last week's trade. Nearby NYMEX crude oil futures spreads have weakened since March 17, with the May/June spread trading at minus $1.11/barrel, its weakest since March 8, showing growing commercial bearishness. The build in U.S. inventories remains problematic, while if the production freeze proposed by OPEC even happens, production would be frozen at-or-near record levels meaning that the global over-supply situation continues.

2) Continued support for the U.S. dollar. While the most recent U.S. Federal Reserve statement suggested that two interest rate hikes are likely in 2016, Goldman Sachs is suggesting that four hikes are imminent in the current year in order to keep the economy in balance, with a widening spread between Canadian and U.S. rates expected to weigh on Canada's currency.

3) Canada's federal budget is calling for deficits of some $113 billion over the next five years in order to boost Canada's economy, despite election promises which indicated much smaller deficits and a return to a balance budget by the end of the four-year term. The definition of infrastructure is used loosely in the budget, so the boost to the economy may be minimal despite the stimulus spending involved. It is apparent that conservative thinkers will struggle with the direction of this government. As seen on the attached chart, investors have pared their net-short futures position from 66,819 contracts, the largest net-short since Aug. 15, to a net-short of 16,826 contracts, the smallest position since June 2015. Their actions will have a bearing on market direction as we go forward.

At the same time, seasonal patterns would suggest that April is a good month for the Canadian dollar. The Globe and Mail reported that over the past 20 years the dollar went up an average of nearly 2% in the month of April. It has also closed higher in April in each of the past 10 years.

Thackray's 2016 Investor Guide qualifies this by linking April's Canadian dollar performance to that of crude oil, which also normally experiences seasonal strength during the month.

Nearby potential technical support levels to watch include the upward-sloping trend line, which has been in place since the Jan. 20 low. This support is found at $.7551 CAD/USD. Moving average support may also be tested at the contracts' 20-day moving average at $.7529 CAD/USD as well as the 200-day moving average found at $.7524 CAD/USD. A breach of these three levels of support could lead to a continued move lower to $.7387 CAD/USD, the 38.2% retracement of recent uptrend.

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DTN 360 Poll

This week's poll asks whether you think the strengthening of the Canadian dollar against its U.S. counterpart over recent months makes sense. You can weigh in with your thoughts on DTN's weekly poll, found at the lower-right of your DTN Home Page.

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

Follow Cliff Jamieson on Twitter @CliffJamieson

(ES)

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