Canadian Dollar Technical Analysis Date: March 2, 2016 CAD SPOT: 1.3440 Below is a sample of some of the information I would look at when conducting technical analysis on the Canadian Dollar. The Relative Strength of the Canadian is almost at overbought levels. Sitting at 67, with 70 indicating overbought. With RSI at overbought, and the trend for CAD still bearish, it would appear that this overbought condition should be used to build USD positions. The non-commercial (speculator) positions from the Commodity Futures Trading Commission Data show that shorts have been exiting their positions. While not sitting at extreme positioning anymore, the velocity of any further CAD gains could be weaker given the overbought condition and as short covering subsides.
Speculators are still considerably positioning net short so if CAD continues to strengthen the shorts will continue to cover, leading to an exacerbated moved. The 4-year weekly Ichimoku chart show the CAD has stayed above the cloud for the duration of its rally. The cloud is also very thick and is upward sloping, this should lead to considerable support on any CAD strength. The top of the cloud has a price of 1.2822, which should offer support. Changing the perspective and looking at the Ichimoku on a daily price basis shows that the CAD has broken the cloud support. However, when looking at the lagging span, which is the current price pushed back 26 weeks, it looks like it is finding support at the bottom of the cloud. If the lagging span is to break the lower cloud support, there could be further gains for CAD. However, with the weekly Ichimoku still holding above the cloud base, a longer term basis for further weakness in CAD still holds. There looks to be strong support for CAD not far below the current price. With both the 200 DMA as well as the 50% retracement levels both at 1.3285 level.
The Canadian Dollar recently broke its neckline support from a head and shoulders pattern. The measured move off how far CAD could possibly rally is measured from the neckline to the top of the head. This would indicate a possible measured move to 1.285. CAD looks like it will find support at the 1.28 level. In March this level acted as resistance, then after breaking out in July was retested in October where the level held. A retracement back to 1.28 level should be a formidable level for CAD to break through as several technical indicators are showing it to be support.
With CAD correlation to WTI currently standing at around.67 the Canadian Dollar is truly trading as a petrocurrency. With the Canadian Dollar having such high correlation with oil, it is worth looking at the technicals behind WTI. With spot WTI having recently broken out from its downtrend and now trading above its 50 DMA, there could be room for WTI to continue its rally. Given the high level of correlation this would likely lead to a continuation of CAD strength.
When looking at the Canada US Swap Spreads they have turned up lately and the Canadian Dollar has followed. With the upcoming Bank of Canada rate decision only implying a 12% chance of a rate cut in March, according to OIS implied rates. This is down from over 70% chance of a rate cut in March at the start of this year. In the United States, the fed fund rates are only implying an 8% chance of a rate hike in March, down from over 60% chance of a hike at the start of the year. With rate cut expectations being reduced in Canada and rate hike expectations being reduced in the United States, these factors have helped lead to a nearly 9% rally in CAD since bottoming in January. With such a large quick move in CAD, and with future rate expectations changing so quickly, the case for further CAD appreciation is becoming less compelling. That said, CAD has gaining momentum and a follow through with this momentum could lead to further strengthen in CAD. If CAD is to continue to strengthen further from here, then the Bank of Canada will soon start to become unnerved as the benefits to the Canadian economy from a weaker currency will be unwound. The Bank of Canada has stated that they are forecasting CAD to average.72 over the next 2 years. The Canadian Dollar based on a variety of fair value Purchasing Power metrics is implying roughly a 10% overvalue. This should be taken into consideration but since over/undervalued levels can persist for long periods of time it is difficult to make investing or trading decisions off of long term fair values. Also, when looking at analysts forecasts for the end of this year we are currently sitting at the average of their estimates at round.74 cents. Given all this, if rate expectations shift by either increasing the chance of rate hikes in the US or increasing the change of a cut in Canada this will impact the Swaps spreads as well as the CADUSD cross.
CAD has been in a clear channel for the last year and a half, CAD may find support at the lower end of this channel. The Canadian Dollar has a very high level of correlation to the TSX, with a correlation of.61. If the risk on equity rally continues then CAD will likely continue to appreciate as it is trading as a risk on proxy. This elevated correlation to equities makes sense as both CAD and equities are currently trading in lock step with the oil market.
Of the Majors, the Canadian Dollar is the second strongest performer YTD. This is impressive given the horrendous start to the year that the Loonie had. Given CAD outperformance this might worry the BOC as the competitive advantage for Canadian exports might be lost. Conclusion: By looking at the above analysis, I would use this recent CAD strength to start building a long USD position as I would expect the medium and long term CAD weakness to persist. That said, CAD has broken through several key resistance levels and has built momentum over the last two months. I see strong support at the.78 level, and would keep building up a position up until this level. If CAD breaks the.78 level, I would reevaluate the long USD investment thesis and have a stop placed at the.80.