LOONIEVIEWS- DLOONIE UNCHAINED
The Canadian dollar is likely to grind higher over the coming months due to diminishing risks of a European sovereign debt meltdown, better than expected growth from China, a bullish bias to domestic interest rates and a sense that the USA will find a way to skirt around the debt ceiling issue. The risks to this scenario are many and include a surprising major European nation credit default and ongoing political unrest in the Middle East (Iran, Syria, Yemen etc) sabre rattling by China with their South China Sea neighbors and Japan. Closer to home, if the myriad of predictions of a ‘housing collapse” occurs then the DLOONIE becomes unchained.
The Canadian dollar is locked within a 0.9820-.0.9920 trading band with intra-day trading activity confined to an even smaller range even though other currency pairs (ie: AUD/USD, USD/JPY and EUR/USD) are more robust. The lack of movement in the domestic currency pair may be attributed to balanced risks in the macroeconomic environment. The European Union and the ECB have managed to create a sense that they are making headway in resolving the debt crisis putting pressure on the American’s to get their financial house in order while at the same time, the Chinese economy is showing signs of that the slowdown is over. However, the “Buy CAD$” story is now old and stale. Investors bought Canadian dollars because: A) Canada’s AAA rating B) hawkish bias to Canadian interest rates C) prospect of rising oil prices due to global growth D) Improving outlook for US economy. The argument can be made that the loonie accurately reflects the current and near term future fundamentals.
2013 TECHNICAL PICTURE
The outlook for 2013 is for the Canadian dollar to continue to grind higher. As the chart below show, the USD/CAD is in a well-defined downtrend channel since June 2012 (green area) which itself is within a much longer USD/CAD downtrend, intact since June 2009. There is major support at 0.9730. A USD/CAD move through 0.9980 could extend to around 1.0220 and the overall USD/CAD would still remain intact.
Chart 1) 5 year daily USD/CAD with both downtrend channels
Chart 2) 30 day Hourly chart-trading bands clearly defined
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Vice President, FX Trading