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Blame Canada! Loonie Strength on Speculation of Interest Rate Hike

by Rafael Rosa on April 20, 2010

The Canadian Dollar went off-the-charts today as the Bank of Canada (”BoC”) speculated that rates may start going up in July 2010 (WSJ Article). To see the press release from the BoC, click here.

I was short the USD/CAD & AUD/CAD crosses and long the CAD/JPY cross at the time of the release. Overall, it added up to a great morning.

If you go back a few weeks, I was all about going long the USD/CAD on any pullback. I was also not a believer in parity when it came to the cross. After the BoC announcement today, my bias on the pair is neutral, but looking for more potential downside. As the chart below shows, we have a shooting star with a large bearish confirmation candle. The pair has had a hard time breaking below .9960; however, now it is likely to go lower with fundamentals (i.e. interest rate hike possibility in July) supporting more downside in the cross.

usd cad daily ir hike 2 Blame Canada! Loonie Strength on Speculation of Interest Rate Hike

The CAD/JPY is another great opportunity to play the Canadian dollar. As long as the pair stays above the 90.50 zone, I would be buying on pullbacks. The 90.50 was a huge resistance which took months to break and is likely to act as a good support level. If the pair breaks below the support (risk-aversion due to Greece problems likely), I would be looking to go short. See chart below:

cadjpy daily support 2 Blame Canada! Loonie Strength on Speculation of Interest Rate Hike

Lastly, we have the much-hated-against short AUD/CAD possibility. I’ve really been beating on this dead horse for quite some time. I’ve been short the cross on the expectation of strong Canadian economic data. While the Aussie has been loved across the board, its interest rate hikes are near the end for now. Therefore, the Australian dollar appreciation on the basis of fundamentals has pretty much ran its course/dried up. It’s time for the Canadian dollar to shine as more rate hike expectations build up.

The technicals also favor the Canadian dollar. The chart below clearly illustrates how the daily 100 SMA is about to cross-over the 200 SMA. These important moving averages will likely act as strong resistance on the upside.

There is also a daily wedge that has been forming for months. The wedge closed yesterday and the Canadian news has come out just in time to show the pair which direction to breakout: South.

audcad ir wedge break 2 Blame Canada! Loonie Strength on Speculation of Interest Rate Hike

I’m currently short AUD/CAD from .9288 and .9218. A break below .9230 exposes the .9171 level (the 61.8% retracement level of the .8547-.9915 run). My last target would be the .9000 zone.

Good Luck!


Technorati Tags: canadian dollar, canda, fundamental analysis, fx trading, intraday trading, loonie, loonie analysis, loonie dollar, loonie rate hike, monetary policy, Technical Analysis, trade the loonie, usd/cad

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