Loonie Swoons
Fundamentals
The Canadian Dollar is lower for the third consecutive session on weaker Crude Oil prices and risk aversion. The loonie was among the best performing currencies against the greenback from March to June because of the recovery in global equity markets and commodities, but has been among the worst performing currencies during the month of August. The Canadian Dollar's success was its own undoing, as traders bought-up other commodity currencies that did not perform quite as well. News that China may try to rein in capacity growth in steel and cement, as well as energy, can be seen as having a negative impact on the Canadian currency in the near term. This policy suggests that base metal, coal and petroleum imports may suffer in the near- term to avoid a possible supply glut. If the Chinese government is successful in this regard, it would be seen as bullish for the loonie over the long haul, despite the negative short-term impact.
Traders are also beginning to sense that the rally in equities and commodities may be overdone for the time being. This could result in risk aversion by traders, which would benefit the US Dollar and Japanese Yen at the expense of higher yielding, or "new" currencies, such as the Canadian and Australian Dollars. Crude Oil inventories showed an unexpected build yesterday, which could adversely affect the Canadian Dollar, as it is Canada's largest export. It is interesting to note that Nigerian Crude Oil production has recently increased significantly due to better security measures in the Niger Delta region. Nigerian insurrection has been a minor driving force behind the Crude Oil rally, so relative stability can be seen as a negative for Oil prices. Crude Oil is also approaching its uptrend line, and a breakdown below this key trend line could result in a stagnation in Oil prices, which could further pressure the loonie.
Trading Ideas
Given the negative technical and fundamental bias, some traders may possibly wish to consider taking on a bearish position. It may possibly be advisable, however, to wait for the double-top to be confirmed on a solid close below 0.9000 in the September contract before entering into such a position. The apparent double-top could turn out to, in fact, be a wedge pattern over the long run if the top is not confirmed. One may wish to enter into a short futures contract on a close below 0.9000, with a stop at 0.9300 and a downside objective of 0.8550. The potential risk is roughly $3,000, while the potential gain is around $4,500, depending on the exact point of entry.
Technicals
Turning to the chart, it appears that the September Canadian Dollar is coming close to a key technical level near 0.9000. A breakdown below this level would confirm a double-top formation on the daily chart, which could send prices down to the mid 0.80's. A close above 0.9300 would negate the pattern. This support area at 0.9000 also coincides with the 50-day moving average. A significant close below the average could signal that the trend may be shifting downward over the intermediate future. We also see a bearish crossover in the slow stochastics, signaling weakness.
Rob Kurzatkowski, Senior Commodity Analyst
