C$ > US$! How Long Will This Last?
Today's Idea
Some traders bullish on the Canadian Dollar longer term who wish to minimize some of the day-to-day volatility that can be seen in the FX markets may wish to explore the purchase of a bull call spread in the deferred contract months. For example, with June Canadian Dollar futures trading at 1.0022 as of this writing, the June 1.0100 calls could be bought and the June 1.0600 calls sold for about 0.0155, or $1,550 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade, with a potential profit of $5,000 minus the premium paid which would be realized if June Canadian Dollar futures are trading above 1.0600 at option expiration in early June.
Fundamentals
The days of the "discounted" dollars of our neighbors to the north may become a thing of the past, as the Canadian Dollar continued to make its way above "par" vs. the U.S. Dollar. The reasons for the strength in the "Loonie" are many, including the rise in commodity prices, a much stronger banking system, and higher short-term interest rates. All these factors have Canadian economic growth prospects looking bright. On Friday, Statistics Canada reported that Canadian retail sales rose by 1.3%, following up from a 1% gain in October and the 6th consecutive monthly increase reported. This news has offset, for the time being, some "dovish" comments from the Bank of Canada (BOC) earlier last week, after the BOC left its overnight interest rates unchanged at 1%, citing continued uncertainty in the global economic recovery. These comments sent the C$ lower, as traders feared that the BOC would not be raising interest rates for the foreseeable future. However, as Canada is a major producer and exporter of commodities, including oil, grains, and metals – all "stuff" that the emerging economies of the world will need -- it certainly appears that the economic outlook is bright for Canada and, in turn, for the Canadian Dollar.
Technical Notes
Looking at the daily continuation chart for Canadian Dollar futures, we notice the bull market that began in March of 2009 is stall in force, with prices starting to pull away from the 200-day moving average. I have drawn a trend-line from the March 2009 lows, and prices would currently have to fall below 0.9790 before most bulls would start to get nervous. The 14-day RSI has moved to a neutral level, with a current reading of 54.73. The recent high made on January 18th of 1.0153 looks to be the next resistance point for the March futures, with support found at the December 21st low of 0.9766.
Mike Zarembski, Senior Commodity Analyst
