Canada Markets

What Lies Ahead for the Canadian Dollar?

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
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The continuous active Canadian dollar weekly chart shows this week's activity reaching a lower low for the second consecutive week, while Wednesday's low tested the November low of $0.73605 CAD/USD, as indicated by the horizontal red dashed line. The exchange rate has fallen below the support of the 50% retracement of the move from the January low to the May high, while a breach of the November low could result in a further move to $0.72735. The most recent CFTC data shows investors holding a bearish net-short futures position for the 13th consecutive week as of Dec. 19 (lower study). (DTN graphic by Nick Scalise)

Before looking at where the Canadian dollar is at and where it could go in 2017, here's a quick look back at 2016. The continuous active chart shows a low of $0.6809 CAD/USD reached on Jan. 20. One of the most memorable forecasts making media headlines during this period was for a 2016 low of $0.59, which simply failed to materialize. From the January low, a May 3 high of $0.8025 was reached, while the weekly or intermediate trend has been lower since, with the end of year trade appearing like it will end close to $0.7417 CAD/USD, the 50% retracement of the move from the January low to the May high.

Our last look at the Canadian dollar was earlier in the month of December during a period when the currency achieved six successive higher highs on the daily chart to reach a short-term high on Dec. 14, only to signal a sharp reversal by printing a bearish outside-day trading bar and closing 77 basis points lower on the nearby December future. This was a day when crude oil trade resulted in a bullish gap higher but failed to hold near session highs, while finishing closer to the lower-end of the day's trading range in positive territory. As seen on the attached chart, the continuous weekly chart also showed a bearish outside week trading bar for the week of Dec. 12, losing 108 basis points over the course of the week.

This is the season where the banks and various analysts make headlines with predictions for the upcoming year. Of course many of these forecasts are in turn based on forecasts for crude oil and monetary policy in the United States, which in turn will be closely tied to whether President Trump delivers on promises made and how the economy reacts. There seems a consensus for diverging policy in the Canada and U.S., which could lead to further rate cuts in the U.S. in 2017 while Canada is expected to hold steady, perhaps even cut according to some analysts.

Here's a roundup of some of the forecasts for 2017:

-- BMO's forecasts show the Canadian dollar gradually weakening over the year to a low of $0.7280 in the fourth quarter.

-- CIBC's December forecast calls for a low of $0.72 in the third quarter and for a slight recovery to $0.73 by the fourth quarter.

-- Scotiabank's recent 2017 forecasts call for a move to a low of $0.7246 by the second quarter and strengthening to an average of $0.7353 by the fourth quarter.

-- David Doyle of Macquarie Capital Markets Canada Ltd, the firm behind the $0.59 forecast in 2016, sees a low of $0.65 in the next 12 months.

-- Alfonso Esparza of OANDA, a currency strategist interviewed on Business News Network claims the loonie could hit a low of $0.60 in 2017, with expectations that U.S. President-elect Donald Trump will deliver on promises, leading to a strengthening U.S. economy and further U.S. rate cuts, while Canada holds rates steady.

The weekly loss seen the week of Dec. 12 was the first of two consecutive lower weekly closes resulting in the loss of more than 2 cents, while a modest gain for the current week has recovered a portion of the losses. This week's low fell to the Nov. 14 low of $0.73605 CAD/USD, which is the lowest level seen since February.

As seen on the middle-study of this chart, weekly momentum indicators appear to be moving into a sideways direction near the lower-end of the neutral zone on the chart. This comes after the market found support at the November low this week while Thursday's close will be very close to the 50% retracement of the move from 2016's low in January to the 2016 high in May, calculated at $0.7417 CAD/USD. Depending on Friday's move, the year's trade could also end near this support level.

Should support fail at the November low of $0.73605 CAD/USD, a further slide to the 61.8% retracement of the same uptrend could be in order, calculated at $0.72735 CAD/USD.

The lower study shows a histogram of the net futures position held by investors. While they were shown to pare their bearish net-short position in the latest data as of Dec. 19, this group has held a bearish net-short position for a 13-week period. Two reports which will be watched close early in the New Year are the Canadian jobs data and the monthly Merchandise Trade report, both to be released on Friday, Jan. 6.

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DTN 360 Poll

This week's question asks what you think is the top Canadian agriculture story of 2016? Please share your thoughts on this week's question, which is found at the lower-right on your DTN Homepage. I encourage you to drop a line to cliff.jamieson@dtn.com to share your thoughts on this subject, with feedback to be compiled for a January piece for the Canada Markets blog.

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

Follow Cliff Jamieson on Twitter @CliffJamieson

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Jacob Thiessen
12/30/2016 | 2:05 PM CST
Good information on a important subject going forward into 2017. Thanks from Jacob Thiessen