Canadian Dollar Awakening

Canadian Dollar futures are higher once again his morning, boosted by rising crude oil and equity prices. Traders have been exiting their risk averse positions in recent weeks, such as being long the US dollar, on the strength in equity prices and renewed optimism that the global downturn may reverse course sooner rather than later. Yesterday’s pending home sales and construction spending were both much better than expected, which can be seen as good news for banks, as it could mean an upswing in loan demand may be on the horizon.

The stress test results that are slated to be released on Thursday may have a huge bearing on how the currency markets behave. If the results are positive, the unwinding of risk averse trades may continue, which could benefit the Loonie. Strengthening commodity prices are also a major force behind the recent upswing in the Canadian Dollar. Canada is the chief exporter of Crude Oil to the US, so traders will be keenly watching the price of this commodity, in particular, as prices hit 5-month highs yesterday.

The fate of the US auto industry will also be on the minds of traders. If the Chrysler-Fiat partnership is successful, the employment situation in Canada may improve. The same can be said for Ford (F) and GM (GM). On the flip side, if the Big 3 continue to flounder, the unemployment situation in Canada remains a negative force working against the Canadian Dollar. The swine flu outbreak needs to be closely watched. It looks as though the virus has been contained for the most part, but a sharp increase in cases could have a negative impact on the North American economy and could work against the Loonie.

Trading Ideas

Given the bullish technical and fundamental forecast for the Canadian Dollar, some traders may wish to consider entering a bullish strategy. One such strategy could be to buy the Canadian Dollar future at 0.8550 or lower. To hedge this position, traders could then place a collar on the position by selling an 0.8850 call and buying an 0.8300 for even money. If the price of the June futures closes above 0.8850 on expiration, the maximum profit potential of 300 points, or $3,000, would have been realized. Conversely, if prices were to fall back below the 0.8300 mark on the June 5th expiration date, the maximum risk on the trade is 250 points, or $2,500.

Technicals

The June Canadian Dollar chart looks as though the market may be poised to break out of its sideways trading range, after closing above resistance at the 0.8474 mark. For the market to get into bull mode, prices may need to advance beyond the November high close of 0.8672. If the market is able to find footing above 0.8672, the Canadian Dollar could advance to the low to mid-0.9000’s. Despite the solid advances in recent sessions, the RSI and momentum indicators have lagged the price movement of the futures. This could be an indication that the trend is weakening or poised for a reversal, so traders may choose to tread lightly.

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