Canada Markets

CAD Holds Above Support, Trades Range-Bound

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
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The spot Canadian dollar rose 50 basis points on Wednesday to close back above $0.80 CAD/USD. This follows Tuesday's test of the two-week low, while retracement support lies below at $0.7932 CAD/USD. The lower study shows the investor net-long futures position in the Canadian dollar increasing for the fourth consecutive week as of Oct. 10, shown by the blue bars of the histogram which increased to the highest level since October 2012 at 76,392 contracts. (DTN graphic by Nick Scalise)

The Canadian dollar received a shot in the arm Wednesday when Statistics Canada reported manufacturing sales rising 1.6% in August to $53.5 billion, following two consecutive monthly declines after the July sales were reported at the lowest level in eight months. Further help came from the first weakness seen in the U.S. dollar index in three sessions, while crude oil posted modest gains, another supportive factor.

As seen on the attached chart, the Oct. 6 low of $0.79530 CAD/USD fell just short of testing support at $0.79317 CAD/USD, which is the 33% retracement of the move from the May 5 low to the September high. Over the month of October, the loonie has traded over a 78-basis-point range, testing the lower ending of the range in Tuesday's trade, while nearing the upper end of the range in Wednesday's trade. Range support lies at the Oct. 6 low of $0.79530 CAD/USD, while the upper end of the range lies at $0.80313 CAD/USD. A breach of the 33% retracement level at $0.79317 could lead to a further decline to $0.78794 CAD/USD.

CFTC data as of Oct. 10 shows investors, or noncommercial traders, increasing their net-long futures position to 76,392 contracts as of Oct. 10 (blue histogram bars in the lower study), the fourth consecutive weekly increase while the largest or most bullish position held since the week of Oct. 31, 2012, or almost five years. It is interesting to note that as of the week of May 22, investors held the largest net-short on record of 99,109 contracts, which points to the wild swing seen in trader sentiment over a few short months. The current position could be viewed as bearish, while any sign of nervousness among speculators could lead to selling.

The Equity Clock shows that, over the past 20 years through the end of 2016, the Canadian dollar future tends to lose ground through the last quarter of the year, losing 0.2% on average in October, an additional 0.5% in November and has averaged unchanged in December. January is reported to be the roughest month on the Canadian dollar, with an average 0.9% drop recorded over this 20-year period.

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One Canadian economics firm is suggesting that financial markets is indicating odds of an October rate hike at only 22%, while do point to the potential for one rate hike in 2018. At the same time, rumours of U.S. President Donald Trump's replacement to chair the Federal Reserve point to a more hawkish individual that is expected to lead to further rate hikes, which will likely weigh on the Canadian currency.

Uncertainty surrounding the ongoing NAFTA negotiations could also weigh on the Canadian dollar. Both Canada's and Mexico's rejection of U.S. demands at the negotiating table results in a great deal of uncertainty surrounding trade and investment decisions.

Despite the negative factors affecting the Canadian dollar, a move above $0.80272, last week's high, by the end of the week and a higher close overall could signal the formation of a bullish outside-week trading bar.

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

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