An Outlook for the Canadian Dollar
The Canadian Dollar has a history of moving higher from mid March to the end of May. Will history repeat this year?
Seasonal influences
A recent seasonality study based on data for the past 20 years shows that the Canadian Dollar has a seasonal sweet spot between mid March and the end of May. On average, the Canadian Dollar has gained 2.0 percent per period against the U.S. Dollar. The sweet spot corresponds to a period when seasonal demand for commodities such as lumber, copper, zinc and nickel as well as manufactured goods such as autos reaches a high.
Technical influences
The Canadian Dollar appears poised to move above a tight five month trading range between 92.16 cents and 97.79 cents U.S. Intermediate trend is up. The Canuck Buck recently bounced from its 200 day moving average currently at 92.71 cents U.S. . The Canadian Dollar held its trading range despite a 9.6 percent gain by the U.S. Dollar Index since December. Historically, the Canadian Dollar has traded lower when the U.S. Dollar traded higher. A break above resistance at 97.79 cents U.S. implies intermediate upside potential to 103.75 cents U.S.
Chart courtesy of StockCharts.com www.stockcharts.com
Fundamental influences
A series of events are coming together to trigger a breakout by the Canadian Dollar during its next seasonal sweet spot between mid March and the end of May.
- The Canadian economy is recovering strongly. News last week, that fourth quarter real annualized Gross Domestic Product rose by a faster than expected 5.0% rate, confirmed the trend. Growth is coming from greater federal government spending related to an economic stimulus program and from rising demand and prices for commodities including copper, zinc, nickel, crude oil, potash and lumber.
- Strength in the Canadian economy and its currency relative to other G8 countries is attracting speculative attention by international investors. The Russian central bank recently noted its intentions to diversify its currency reserves by purchasing Canadian Dollars.
- Early technical signs of an intermediate peak in the U.S. Dollar Index have appeared during the past two weeks. Recent strength in the U.S. Dollar Index was triggered partially by weakness in the Euro that, in turn, was triggered by concerns about a possible default by Greece’s debt. At least a temporary resolution of Greece’s financial crisis is likely to be reached this week. The U.S. Dollar Index has a history of peaking each year near the end of March. Technical confirmation of an intermediate peak in the U.S. Dollar likely will be the trigger for a breakout by the Canadian Dollar above the 97.79 cents U.S. level.
- The Bank of Canada confirmed last week that monetary policy is expected to remain accommodative until at least the end of the June, but hinted that an easy money policy was approaching an end. Anticipation of a tightening monetary policy in the second half of 2010 will prompt strength in the Canadian Dollar.
What to do
The preferred strategy is to continue to own investments that trade in Canadian Dollars. Investments in securities trading in other currencies also are possible if they are fully hedged against currency risk. Investments in U.S. Dollars are particularly vulnerable if not hedged.
Disclaimer: Comments and opinions offered in this report are for information only. They should not be considered as advice to purchase or to sell mentioned securities. Data offered in this report is believed to be accurate, but is not guaranteed.
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