Canada Markets

February was a Tough <onth for the Canadian Dollar

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
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The spot Canadian dollar finished modestly lower on Thursday, following a test of support and its weakest month seen since May 2016. Today's trade saw a test of the 50% retracement of the May-through-September rally at $.77608 CAD/USD. The middle study shows investors holding the smallest net-long position held in four weeks at 23,127 contracts, while down 70% from the high reached in October. (DTN graphic by ProphetX)

The Canadian dollar faced heavy selling in February, with the spot dollar losing 332 basis points or 4% over the month, the largest monthly drop since May 2016, which the Globe and Mail noted was the month of the Fort McMurray fire. Thursday's trade resulted in early losses pared for a finish at $.77926 CAD/USD, down 1 basis point after reaching the lowest level seen in almost 10 weeks.

A number of issues may lead to pressure on the loonie. This week's federal budget highlighted a continued string of annual deficits into the next decade. Crude oil reached a low of $60.18/barrel this session, down from the 2018 high of $66.66/barrel, while poised to close lower for the first week in the past three weeks. President Trump is favoring import tariffs on steel and aluminum after being "decimated by decades of unfair trade and bad policy," which could possibly lead to retaliatory measures and be a hint of what is to come in the ongoing North American Free Trade Agreement negotiations. As well, Statistics Canada is set to release fourth quarter economic growth on Friday, with speculation over the week pointing to a level of growth that may fall short of the Bank of Canada forecasts to the year.

The spot Canadian dollar has closed lower in eight of the past nine sessions, while gapping lower in each of the past three days. Trade dipped below retracement support at $.77608 CAD/USD, which represents the 50% retracement of the move from the May 2017 low to the September 2017 high. As can be seen on the attached chart, this level also provided support between Oct. 27 and Dec. 19, with a number of tests seen on the daily chart. A daily low of $.7748 CAD/USD was reached over this period, while today's low of $.77578 came close this test. A move below this level could result in a further slide to $.7642 CAD/USD, the 61.8% retracement of the May-to-September uptrend.

As well, as shown on the attached chart, the Canadian dollar is slowly losing its bullish appeal with investors, with the histogram in the middle study showing the bullish net-long position held by investors falling for the second week to 23,127 contracts as reported in CFTC's data as of Feb. 20. This is the lowest level reported in four weeks and down 69.7% from the 76,392 contract net-long reported as of Oct. 10.

A sustained move below the 50% retracement level, should it happen, could lead to a further move to a test of the 61.8% retracement level at $.76422 CAD/USD, a level last traded in June 2017.

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

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