Canada Markets

This blog was supposed to be, and still is for the most part, an attempt to draw attention to the likelihood that a long-term low was put in for the Canadian dollar with the sharp rally off support in February. The dampened enthusiasm comes from a disappointing Canadian federal election April 28 for fiscally responsible, conservative-minded individuals. Eventually, currency traders may be included in that group.

You would never know there was an election by watching markets for a reaction. The Canadian dollar managed to move in the smallest of increments around unchanged as the results unfolded with currency markets obsessed with one thing. The driving force continues to be an obsession with the U.S. dollar against all other currencies amid tariff wars and dramatic domestic policy changes.

While on the topic, the re-election of the Liberal party should be long-term bearish for the Canadian dollar, all things equal. More of the same actions are being promised that drove the currency down to the lowest levels seen since 2002 (before reversing higher on U.S. dollar weakness). A prime example is Prime Minister Mark Carney's campaign promise of $130 billion in new spending over the next four years, with commitments expected to add $225 billion to the federal debt. But those long-term concerns will be overshadowed by more pressing issues for the U.S. dollar in the near term.

From a fundamental point of view, it's hard to argue with the benefits of being a resource-based economy when gold and cattle are hitting record highs, grains and oilseeds are historically strong and there is plenty of international interest in crude oil and rare earth minerals. That fact has not likely been overlooked by foreign investors looking to diversify away from traditional U.S.-based investments.

Putting facts behind the theory, Canadian January Gross Domestic Product (GDP) hit an all-time high of $2.292 trillion dollars. The 0.4% increase in January was an improvement over the 0.3% gain in December. Worth noting, according to Statistics Canada: "Goods-producing industries contributed the most to the increase, rising 1.1% in January, the largest increase since October 2021, as all industrial sectors in aggregate expanded in January 2025." They added, "The mining, quarrying, and oil and gas extraction and manufacturing sectors were the largest contributors to growth."

As is the case with the U.S., inflation had already started to tick up ahead of inevitable tariff impacts with the February Headline CPI reading topping out at 2.6% on an annual basis. It dipped back to 2.3% in March but was well above the September low of 1.6%. For reference, it peaked at 8.1% in June 2022. The uptick and concern about tariff impacts kept the Bank of Canada from reducing interest rates further at its latest meeting. Given Canada's reliance on the U.S. and the potential for tariff-related inflation, this area could be the driving force behind higher rates and a higher Canadian dollar (based on interest rate differentials).

Technically speaking, the monthly Canadian dollar continuation chart attached couldn't make long-term support at 68 cents any clearer. A downtrend line in place since mid-2021 is about to be tested, as is the 25-month moving average. An April close above the consolidation-range-low around 72 cents would already be a minor victory for the bulls, potentially leading to a test of the 100-month moving average and consolidation-range-high near 76 cents. Eventually, a test of the top of the decade-long sideways channel at 83 cents could be seen.

The weekly continuation chart is presenting as a bear market correction (bounce) that is at risk of turning down from the 100-week moving average. Such a pattern suggests those wanting long-hedge protection from a rising Canadian dollar may be able to be patient for now. A retreat from the moving average could provide a more advantageous entry point.

The daily chart has turned decidedly bullish, albeit overbought. A pullback should be monitored for buy signals based on this analysis.

Regarding the participants themselves, the Commitments of Traders (COT) report confirms the rally since the February low was driven by noncommercial fund short-covering. They went from a near-record, net-short of 178,843 contracts at the start of the year to only 66,172 contacts net-short as of April 22. At $100,000 per contract, that represents $11.27 billion in Canadian dollar purchases by the group. Commercials have been taking profits on their long hedges (on the selling side). It's worth noting that should the noncommercials want to push prices higher, their record net-long position was 113,628 contracts held in September 2012.

The only thing guaranteed in life is death and taxes -- likely more so now if you're Canadian. But those that suffer financial harm from a rising loonie may be well rewarded for spending time on a risk management strategy.

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Mitch Miller can be reached at mitchmiller.dtn@gmail.com

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