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Canadian Dollar Ass-Kicking Trades

by Rafael Rosa on July 11, 2010

erin burnett long the loonie Canadian Dollar Ass Kicking Trades

The Canadian economy is doing some serious ass-kicking. It even reminds me of President Obama (see extremely hilarious video below):

As a result of this ass-kicking, the Canadian Dollar is  being Chuck Norris-like and gaining across the board. The latest catalyst contributing to the appreciation of the Canadian Dollar was Canada’s jobs report. According to Statistics Canada, employment increased by 93,000 in June, following gains of 24,700 in May and April’s record 108,700. The unemployment rate, which was expected to stay flat in June at 8.1%, declined to 7.9%. Overall, the headline number was much better than Bloomberg’s expectation  of 20,000 new jobs.

The stellar jobs report is likely to put pressure on the Bank of Canada (B0C“) to further increase its key interest rate. On June 1, the BoC raised its key interest rate by 25 basis points from the record low of 0.25%  to 0.50%. Now, investors are looking for another increase on the BoC’s July 20th meeting. The Wall Street Journal reports that the “Overnight Indexed Swap, considered the most accurate measure of market sentiment, was estimating a 90% probability of a 25-basis-point interest rate increase when the central bank meets on July 20. That’s up from a 55% probability earlier in the week.” The rate hike expectation is likely to once again lead the Canadian Dollar into the parity zone versus the US dollar, assuming the global rally in equities from last week does not breakdown.

In general, as the Canadian jobs report and other data points show, the Canadian economy’s recovery is outperforming most  developed countries. Australia is the only other developed economy that is also outperforming. Therefore, with global macro factors aside, the Loonie  would likely gain against the US Dollar, Japanese Yen, and Swiss Franc, among others.

Last week, global markets experienced a rally that many investors believe will be short-lived. If, say, US equities were to reverse and continue its downward trend the upcoming week, the Loonie would likely lose against the US dollar and Japanese Yen (i.e. safe haven currencies) because it is considered a ‘risky’ asset.

Now, for some charts and technical analysis. The USD/CAD has some interesting formations on the daily chart. First, it seems like a head and shoulders pattern is forming:

daily usdcad hs thumb Canadian Dollar Ass Kicking Trades

NOTE – On all Charts: Blue line= 200 SMA, Orange Line = 100 SMA, Green Line = 55 SMA, Red Line = 21 SMA

The neckline of this H&S  is at the 1.0140-50 zone. Thus, if the expected breakout was to follow from this pattern, we would expect the USD/CAD to go well below parity. I would be slightly skeptical of such a move happening. On a fundamental basis, this would require both global markets to continue on rally mode and the Bank of Canada to further increase rates.

The  chart above also gives insights to a few more things. The pair recently broke through the 200 daily simple moving average (“SMA”) and found support at the 100 daily SMA (which also corresponds to the 21 SMA on the weekly chart). If the pair breaks below this strong support point with conviction, 1.0150 would likely be next, followed by parity.

It is also worth nothing that on Friday, as it broke the 200 SMA, the Loonie was one of the only gainers against the dollar as the Pound and Euro slipped.

The same chart from above can also illustrate a different story. Surprise!  As shown below, it is also possible to identify an inverted head and shoulders pattern on the daily chart. It even looks a bit more well constructed.

inverted hs usdcad thumb Canadian Dollar Ass Kicking Trades

The bear scenario would suggest that if the USD/CAD does not break below the daily 100 SMA, a long  in the pair is appealing as the second shoulder in an inverted H&S is formed. This would require the pair to break above the 200 SMA again and then challenge the neckline level. If the expected breakout was to happen, the pair would likely reach d the 1.10 level. Conspiracy theories and global market breakdowns aside, it would be a very unlikely scenario, especially if the BoC continued to raise interest rates. However, if the doom and gloom predictions of the Dow Jones Industrial averaging going below 8,00 and the S&P slipping to below 900 in the next few weeks happen, it looks very plausible.

The moral of the story appears that the USD/CAD is at a very important level that requires a bit of patience. Alcoa will kick off earnings season on Monday and set the tone. It would be recommended to see how equity and currency markets are going to respond.

If you’re looking to go long the Loonie intraday, a short set-up of the USD/CAD looks appealing at the 1.0380 level (which corresponds to the 21 SMA on the hourly chart) or above. As the chart below shows, the trend on the hourly is down. Entries at the 55 or 100 hourly SMA are also good spots.

usdcad thumb Canadian Dollar Ass Kicking Trades

Bonus

Sometimes, it’s good to move beyond the US dollar crosses. At the moment, the Canadian Dollar versus the Swiss Franc appears to have a great long setup. This pair was battered in the last two weeks as the Swiss Franc started to gain some traction as a safe haven currency. Six months of gains were given up in some 2-3 weeks. However, with the Canadian jobs report and a potential interest rate hike, a bottom at the current levels is possible. Let’s look at the chart below:

cad chf daily thumb Canadian Dollar Ass Kicking Trades

First, the pair had been consolidating for a few days before Friday’s rally. Number two, the chart shows that the pair had found support at a long-term trendline that can be seen on the weekly chart below:

cadchf trendline thumb Canadian Dollar Ass Kicking Trades

Lastly, the pair is back above the 200 SMA on the daily chart. Once again, if markets don’t break down this week, a long setup with an initial target at the 21 daily SMA looks plausible.

Overall, wait for how US markets will open on Monday and then take your positions.

Disclosures: No positions on the Canadian Dollar at the time of writing.


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Canadian Dollar Interest Rate Decision | My Investment Analysis
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