Canadian Dollar Research Report
Published: Wednesday 30 September 2015
After the excitement of August’s rally to the channel top at 2.10, September has been a much quieter month with rates trading within a tight range between 2.00 and 2.05. The rally in late August, was triggered by stock market volatility and concerns over the global growth outlook and its knock on effect for commodity prices. Canada is a net exporter of commodities and therefore any downward pressure on commodity prices is usually seen as a negative for the Canadian economy.
Economic data from Canadian has been a mixed bag this month, with GDP and retail sales showing stronger than expected growth but unemployment climbing to a worse than expected 7%.
The Canadian economy actually contracted in the first half of 2015, but the Bank of Canada believes growth is underpinned by solid household spending (as reflected in the retail sales figures) and a firm recovery in the US with particular strength in sectors of the US economy that are important for Canadian exports.
UK data over the course of the month has largely disappointed and GBP has suffered against most of the majors.
However, oil has recovered from the August lows of US$42 per barrel and is currently trading in the US$48 per barrel region having failed to break above US$50. This near 20% rally in oil from the lows has helped to stabilize the Canadian dollar.
Technically, we appear to be in a period of consolidation within the longer term up trend. As mentioned above we saw the rates test the top of the up channel so it is not that surprising that we have seen a bit of a pull back. When we see a market correction, we would usually expect the prices to move 23.6%-61.8% of the proceeding move. The first Fibonacci level of support at 2.016 is currently underpinning the market, below that is 2.00 simply because it is a round number. If these levels of support fail then the 20 day moving average 1.99 should underpin the market. A break of this level would suggest a move to the lower Bollinger band (currently 1.875). Personally, I do not think that we will see a move this low but we would remain within the long term uptrend even if this did occur.
With momentum turning up from an oversold position (we’re yet to see a buy signal generated) things are looking positive and this would support the notion we’re close to the bottom.
In terms of targets to the upside, I would suggest targeting rates below the top of the channel (currently 2.106) as this coincides with the upper Bollinger band and therefore makes a sensible target.
If you’re trading in the short term, you may need to target rates in the 2.05 region. With a bit more time on your side, I would consider placing orders in the 2.08-2.09 region so ahead of resistance at 2.10. If you’re long term client, the trend remains in your favour meaning price averaging is usually the best way to go. If you’re concerned about the rates falling, then a stop loss below the 20 day moving average seems sensible as a break of this points to a far deeper and sustained correction.
Well as the saying goes, let the trend be your friend. The trend is against you, so it is about trying to make the most of this correction. If you’re able to trade close to 2.00 then I would consider making your move for at least a portion of your funds. If we see a break of 2.05 then the uptrend looks to be resuming and making your move would seem sensible before a return to the highs.