Will the Loonie Move to Parity with the Greenback?
Fundamentals
Canadian Dollar futures have been on an extended holiday of sorts, trading within a 400-tick range since the end of October. However, it looks like bulls are starting to gain the upper hand as the New Year begins. A renewed interest in commodities has certainly benefitted the Canadian Dollar, as the country is a major supplier and exporter of grains, oil, and metals. In addition, the Canadian economy has weathered the recent recession better than its neighbor to the south, and it's banking sector remains on solid footing. The employment picture is also showing improvement, with this Friday's Canadian employment report expected to show a gain of 20,000 jobs in November, on top of the 79,100 jobs gain in October. Canada's real GDP has also shown positive growth recently, with a 0.2% gain in October on top of a 0.4% gain in September. This rebound in the Canadian economic picture has many analysts looking for Canada to raise interest rates much sooner than the U.S., which would add support for buying the Loonie vs. the U.S. Dollar.
Trading Ideas
With signs that the Canadian Dollar has broken-out to the upside, some traders may wish to explore bullish trading strategies using Canadian Dollar futures options -- like buying bull call spreads in March CD options. An example of such a trade would be buying the March Canadian Dollar 0.97 calls and selling the March 1.00 calls. With the March CD contract trading at 0.9638 as of this writing, the spread could be purchased for 1.05 points, or $1050, not including commissions. The premium paid would be the maximum risk on the trade, with a potential gain of $3,000 minus the premium paid if March Canadian Dollars are trading above parity with the U.S. Dollar at expiration in March. Some more aggressive traders may wish to also sell a March CD put below chart support, such as a March 0.93 put, to help offset some of the premium paid for the bull call spread. This would increase the potential profit on the trade, but also increase the risk as well.
Technicals
Looking at the daily continuation chart for Canadian Dollar futures, we notice the market trying to break-out from the 2-month long consolidation pattern. Prices are now above both the 20 and 100-day moving averages, which may be deemed bullish for both short and long-term traders. The 14-day RSI has turned up, with a current reading of 59.41. The only downside we see is that the breakout above resistance has not occurred on higher than average volume, which provides less confirmation that the break-out may be valid. The next major resistance point is seen at the October 15th highs of 0.9798, with support found at the 100-day moving average, currently near the 0.9385 level.
Mike Zarembski, Senior Commodity Analyst
