Further consolidation for the Canadian dollar?

Marius Paun | London, UK | Senior dealer | Wednesday, 28th August 2019

The Canadian dollar is the fifth most widely held reserve currency behind the US dollar, the yen, the euro and the British sterling. At the same time, Canada is the tenth largest economy in the world with a gross domestic product of $1.8 trillion. Being a relatively safe country with a stable legal system and matured political class, its currency accounts for about 2% of global foreign exchange reserves.

Also known as the loonie (named after the bird which appears on the one dollar bill), the Canadian dollar is part of the so called ‘commodity currencies’. In the same group is the Australian dollar, the Norwegian krone and to a lesser extent, in terms of demand, the Chilean peso. The reason for that is the bulk of Canadian economy is linked to the production of commodities like oils and gas, mining metals or agriculture.

Consequently, the Canadian dollar tends to rise when the commodity markets are rising and decline when they are weakening. The commodities super-cycle which started around the turn of the millennium is testimony to that. For example, when oil prices went to a low-double-digits ($10-$12 a barrel) gold was below $300 per troy ounce and grains were also very cheap, the Canadian dollar moved below $0.65.

But conversely when crude oil prices made a record high of $147 a barrel in 2007, the loonie went briefly above parity to the US dollar to a high of $1.10. No later than 2010, the Canadian dollar was still valued at $1.05. Since then the trend has been steadily downwards and today the loonie is worth around $0.75.

As central bankers around the world are now on track for further monetary easing, so the Bank of Canada is expected to follow in the footsteps of the US Federal Reserve’ latest cut. However, the latest inflation figures in Canada surprised on the upside, coming in at +0.5% month on months versus expectations of a rise of just 0.1%. On top of that, last Friday core retail sales data showed an increase of 0.9% against consensus for a decline of 0.1% month on month.

The growing US – China trade disputes are likely to weigh on the global economy outlook which in turn might keep demand for fossil fuels largely subdued. And that does not bode well for the commodity currencies at least on the short term. However foreign exchange is a relative game. Could it come down who cuts the interest rates faster and stronger? It remains to be seen.

The USDCAD pair has reached a recent high of 1.4688 at the beginning of 2016 as the chart shows (which corresponds to the low in the Canadian dollar) and a low of 1.2060 on September 2017 (high in $ CAD).

Bearish scenario (for the Canadian dollar)

We need to see the USDCAD going higher. The chart shows the recent trend to be sideways for the past 15 moths ranging between 1.2770 and 1.3670. The next resistance can be seen at 1.3350 followed by 1.3440 and 1.3530. Encouraging for that, the price is now above the 9 and 21 week moving averages. But ultimately a move above 1.3670 will confirm the re establishment of the uptrend.

Bullish scenario (for the Canadian dollar)

However, the 9 week moving averages crossed below the 21 week moving averages in the second half of June this year thus giving the sell signal for the USDCAD. If that was to happen, the next support will be just above 1.32 followed by 1.3050.