The Market's Loonie Tunes

• InEgoVeritas
• October 13th, 2009

We’ve seen a number of important Forex players whistling pro Canadian dollar tunes in the last week. Indeed, from a price action perspective, the currency certainly has reacted to them. The latest positive Canadian Unemployment rate seems to have triggered this new wave of popularity. The figure at 8.4% was interpreted by the market as a sign the Canadian economy is turning and that the Bank of Canada (BoC) will be forced to raise rates earlier than previously forecasted.

The $USDCAD pair has in effect been under intense sales pressure since then. As can be observed from the following chart, the pair has broken its low of the year and has now reached the first Fibonacci extension target on the daily time-frame.

Based on the 38,2% retracement of the previous move down, the final target should be its 161.8% extension just below parity. Now prior to this, consolidation is certainly required. It is important to realise that the target remains valid until the pair breaks back and closes above the previous low of the year.

The weekly chart presents even more aggressive targets. Ultimately, this pair’s objective is around the lowest levels it reached at the end of 2007. Keep in mind that for such a long-term target, it is always better to take positions on spikes and to unload on dips.

Friday’s Canadian CPI reading should provide the market with clues on the BoC’s margin with rates going forward. If the CPI is dis-inflationary, expect a pull back up and some consolidation of the latest move. A sign of increased inflation could provide more fuel to the downside.

The $USDCAD pair is for many traders one of the hardest to trade. This is mainly a consequence of the perception that it is always driven by the price of oil. It is indeed, but only with the right conditions. One must remember that 75% (down from 80%) of Canadian exports still head south to the US. A weak US economy hence isn’t good for Canada and usually impacts the pair as much as the price of oil. The ultimate combination to short this pair is an increasing price of oil with a bullish US stock market. This combo really produces a “down the elevator” effect on the pair. Also keep in mind that Canada exports plenty of other natural resources hence the best single correlation isn’t with the price of oil but a basket of commodities like the CRB index as can be seen on the following chart.

All of these factors must be kept in mind when planning on going short the pair. Always remember that the market might test your patience but do not let short-term price action distract you from the underlying strong fundamental move that is taking place. Most retail traders have a tendency to fade these sorts of moves and for this reason, end up missing out on most of the potential gains.

Until next week… that’s all folks!

IEV

httpv://www.youtube.com/watch?v=DH7qq7OjJO8

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

Tickers: Loonie, USDCAD

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