Will a Crude Pullback Slow Down the Loonie?
Today's Idea
The Canadian Dollar fundamentals remain bullish, but the currency does risk seeing selling pressure if Crude Oil prices see a correction. The Bank of Canada is likely to keep interest rates unchanged at 1%, so the rate decision will be a non-event. Like FOMC rate decisions in the US, the language used by the central bank will be more important than the decision itself. Technically, the June futures chart shows the market in an uptrend, but near-term indicators hint at possible weakness. Some traders may wish to consider selling a put option given the overall market strength, but uncertainty over the near-term direction. Some traders may look to sell the May 1.02 puts for a premium of 0.25, or $250. The maxium profit is the initial credit and the trade carries with it substantial risk. Traders may wish to mitigate some of this risk my exiting the trade on a close below 1.02.
Fundamentals
Canadian Dollar futures are trading at their highest levels in over three years, buoyed by strong metal and energy prices. The Loonie's most recent rally has ridden the coattails of Oil's surge. The US imports more Crude Oil from Canada than any other nation, which has caused currency traders to flock to the Canadian Dollar in droves. Investors have been drawn to higher yielding currencies because of central bank policy. Banks around the globe have been in expansion mode at the expense of fighting inflation, which has made long-term government bond rates unattractive. Eventually inflation will rear its ugly head, and bond traders will be locked-in at cheap rates while central banks are raising rates at break-neck speed. Even traders that are not especially bullish on the global economy are now almost forced into riskier, growth investments due to fear of being stuck holding underperforming assets. Canada's economic conditions have improved significantly, and the unemployment rate is at 7.7%, below its average rate of 8.53%. However, a strong currency presents challenges for the nation's exporters. The Bank of Canada meets today to discuss its interest rate policy. The consensus opinion is that the BoC will keep interest rates unchanged at 1%, for fear of sparking further advances in the exchange rate of the Loonie.
Technical Notes
Turning to the chart, we see several signs that the June Canadian Dollar may be weakening a bit. The candles from the past several sessions point to indecision. Also the RSI is at overbought levels, suggesting the market could see consolidation or a pullback in prices as investors take profits. While these near-term indicators can be seen as bearish, the chart does not show significant technical resistance until the 1.0694 level. On the downside, 1.0300 and, more importantly, 1.0000 are support levels.
Rob Kurzatkowski, Senior Commodity Analyst
