The Canuck Stops Here
Fundamentals
The Canadian Dollar has weakened against the greenback in recent sessions due to doubts about the global economic recovery. The World Bank's lowered growth expectations dealt commodity currencies a blow -- including the Canadian, Aussie and Kiwi Dollars. The Bank of Canada is concerned about the currency's rapid appreciation against the US Dollar, citing risks to economic growth. The government has welcomed the pullback in the Canadian Dollar in recent sessions, as it could stimulate demand for Canadian exports of Crude Oil and other raw commodities. A stronger greenback versus a weaker loonie can be seen as mutually beneficial, as a stronger USD would keep inflation in check and help stabilize the price of petroleum.
One factor that may make the Canadian Dollar less attractive than currencies form other commodity exporting nations is interest rates. The Aussie and Kiwi Dollars enjoy an interest rate advantage, at 3.0 and 2.5 percent, respectively, versus the BoC rate of 0.25 percent. While not staggering by any means, bargain-hunting traders could be inclined to favor the higher yielding currencies. The battered auto sector is another reason why traders may shun the Canadian Dollar. If economic data in the US does not show significant improvement, the Canadian auto industry could face further pressure and job losses may continue to mount. Further contraction in global equity markets is a distinct possibility, which could result in defensive buying of the USD.
A revival in commodity buying could make the long-term outlook for the loonie positive, despite the negative near-term pressure. Indications are that investment in commodities is far from peaking, but investors may take a break until the economic picture offers some clarity. Traders will be keeping a keen eye on the FOMC policy statement later on today. If the Fed offers a rosy assessment and hints at a prolonged low interest rate environment, traders may allocate a larger portion of their portfolios toward equities and commodities at the expense of treasuries. A more measured statement could be seen as negative for the Canadian Dollar, as traders may hit the panic button and flock toward the relative safely of the greenback.
Trading Ideas
Given the bearish shift in both technical and fundamental outlooks for the Canadian Dollar, traders may be inclined to test the short side of the market. Traders have been especially fickle over the past two weeks, suggesting that some traders may opt to enter a more conservative strategy. An example of one such strategy would be a bear put spread, buying the August 87 put (CDQ90.87P) and selling the August 85 put (CDQ90.85P) for a debit of 0.0075, or $750. The trade would risk the initial investment, with a maximum profit potential of $1,250 if the price of the September Canadian Dollar closes below 0.8500 on the August 7th expiration date.
Technicals
Turing to the chart, the September Canadian Dollar contract has had several technical setbacks. The chart confirmed a double-top formation last week, which if the measure of the pattern holds true, could result in prices coming back to test May 15th lows at 0.8485. Prices are now testing the 50-day moving average. A significant close below the average could result in further declines and may change the intermediate technical outlook. Oversold conditions on the RSI and stochastics could offer some near-term support for the currency and trigger short-covering. The market is currently resting near support at 0.8694, which may offer further short-term support.
Rob Kurzatkowski, Senior Commodity Analyst
