"Loonie's" Flight Cut Short
Fundamentals
The "Loonie's" flight to parity vs. the U.S. Dollar has taken a detour lately, as concerns that the global economic recovery may be on shaky ground has traders fleeing "risk trades." The budget crisis in Greece and China's attempts to slow its surging economy are among the biggest reasons traders are nervous. The Canadian Dollar and other so called "commodity currencies", such as the Aussie Dollar and Brazilian Real, surged last year, as prospects for improving economic conditions had traders eager to invest in countries whose exports of raw materials would benefit from a recovery. Nearly 50% of Canada's exports are derived from the raw materials sector, making the country a favorite for investment during an economic upturn. Traders expecting better economic circumstances placed so called "carry trades" by buying the "commodity" currencies and selling the low yielding U.S. Dollar and Japanese Yen. However, concerns that the Greek debt situation will not be resolved easily has put "safety" ahead of potential longer-term gains in some traders' minds, triggering an unwinding of these "carry trades", which increased the selling pressure on the Canadian Dollar - especially vs. the Yen. Traders have also reassessed their expectations regarding when the Bank of Canada (BOC) will raise short-term rates, with the consensus now expecting it will be the beginning of the third quarter of this year before the BOC will act. Although the longer-term outlook for Canada and the "Loonie" looks bright, in the near-term the Canadian Dollar could remain on the defensive until the market believes that the European Union has a reasonable plan to deal with the Greek crisis and any global economic recovery will not be stymied.
Trading Ideas
Although the Canadian Dollar is in a short-term downtrend, the economic prospects for our neighbors to the north look positive in the long-term. Some traders wishing to take advantage of the recent set-back to take a bullish position longer-term may wish to consider buying a bull call spread in longer-dated Canadian Dollar options. Using the June contract, currently trading at 0.9383, a trader could choose to buy the 0.95 call and sell the 1.00 call for a debit of about 1.38 points, or $1,380 per spread, not including commissions. The premium paid would be the maximum risk on the trade, with a potential profit of $5,000 minus the premium paid if the June Canadian Dollar is trading above 1.0000 at option expiration in June.
Technicals
Looking at the daily chart for the March Canadian Dollar, we notice prices accelerated to the downside after falling below the 20-day moving average. Much of the selling is tied to long liquidation as sell-stops are triggered and buyers holding back waiting for lower prices. The next major support point does not come into play until just below the 0.9300 area, at which point the market may wish to test the mettle of "Loonie" bulls to see if fresh buying emerges. The 14-day RSI has weakened considerably, with a current reading of 40.36, although it remains well above oversold levels. The February 5th lows of 0.9274 look to be the next support point for the March contract, with resistance found at the week's high of 0.9643.
Mike Zarembski, Senior Commodity Analyst
