Tuesday, June 14, 2011

Time To Buy The Canadian Dollar Again

The fundamentals in Canada continue to be strong. While the recent string of economic data out of the US has been weak, numbers out of Canada continue to look good. Canada’s employment, for example, grew by 35,900 jobs in April, with an emphasis on private sector and full-time jobs.

Canada still relies on the US as its major export market, but on a relative basis Canada continues to outperform.

As well, expectations are that the Bank of Canada will need to raise interest rates sooner rather than later to remove excess stimulus from the economy. Expectations currently are for Canada to start raising interest rates in September, but it’s possible they could begin as early as July. The prospect of higher interest rates in Canada should continue to keep a bid under the CAD vs. the USD.

Technically, USD/CAD has been bumping up against .9800 since mid-May. It briefly traded above .9800 on 9 separate days during the past month, but not once has it been able to close above this level. .9800 has clearly become the “line in the sand” for this pair.

However, with today’s close back under the 20 day moving average, I think it’s unlikely we see .9800 again. The ascending trendline that’s been in place since May 1 looks to be breaking today, and with both the MACD and RSI signalling bearish reversals I think it’s time to buy Canada (sell USD/CAD) again here.

The bounce in equities and commodity futures overnight only serve to support the “buy Canada” thesis.

I am now short USD/CAD @ .9744 looking for an initial move to .9650, with the potential for an eventual re-test of the recent .9450 lows. Above .9770 puts the view at risk, and above .9800 I am wrong.

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