Today’s Idea

The Canadian Dollar has several factors lining up in its favor at this time — a new, business-friendly government, energy prices supported by the flooding of the Mississippi, and relative economic health compared to the US and Europe. However, some traders may look to tread lightly for the time being, given that the chart shows a potentially ominous signal and the currency could find itself at the mercy of outside commodity markets. For this reason, some traders may wish to consider entering into a bull call spread. For example, some traders may wish to buy the June Canadian Dollar 1.05 calls and sell the June 1.07 calls for a debit of 0.0060, or $600. The trade risks the initial cost and has a maximum profit of $1,400 if the June futures contract closes above 1.0700 at expiration.

Fundamentals

Like the commodity sell-off, the sharp decline in the Canadian Dollar may have been overdone. Profit-taking, as well as the decline in Crude Oil prices, led to selling pressure in the currency. The Loonie is often seen as strictly a commodity currency by many traders, which can explain it symbiotic relationship with the energy and metals markets. However, traders bullish on the Canadian Dollar can also point to the relative fiscal responsibility and improving labor conditions as reasons outside of Oil prices to favor the currency. The recently voted in government vows to cut budget deficits, which are already relatively small when compared with the US and Europe. Also, the Harper government expects to cut taxes for individuals and businesses, which could lead to an increase in consumer spending and job creation. The Bank of Canada also has more leeway than its American and European counterparts to raise rates to fight inflationary pressure because of the way the economy recovery has progressed, which could create a favorable interest rate environment for currency traders. Due to traders’ perceptions that the Loonie is strictly a commodity currency, it could find itself at the mercy of outside markets in the event that energy and metals prices decline.

Technical Notes

Turning to the chart, we see the June Canadian Dollar contract finding support near the 1.0300 level. This marks the second time that the futures contract has successful held support at this level. The June contract also dipped below the 50-day moving average, only to rebound above the average, which can be seen as a positive technical sign. To reestablish technical momentum, prices will likely have to take-out the recent high close of 1.0562, while a decline below 1.0300 could trigger selling pressure. It is of interest to note the bearish divergence between price and RSI. RSI peaked in early April, subsequently drifting lower, and prices were on the incline for the remainder of the month. While in and of itself this is not a bearish or selling signal, it could be seen as a hint that prices may take a turn for the worse. A bearish chart breakout would be needed to validate this signal.

Rob Kurzatkowski, Senior Commodity Analyst

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