Canada Markets

The Canadian dollar broke out of its 11-week sideways trade during the week of April 12 to post its best week in four years by increasing nearly 3% over the week. The week of April 19 saw a further push higher of 48 basis points (June electronic trade), and this week has seen gains of almost 100 basis points to move over $0.83 CAD/USD for the first time since late January.

Despite Canada's banks estimating further weakness over the year, a number of supportive factors are leading to the current upward bias.

1) U.S. dollar weakness. Tuesday's move in the U.S. dollar saw the U.S. currency break below support from weekly lows reached in the past five weeks. Tuesday's losses represent the fifth consecutive daily move lower, after breaking below the support of the 50-day moving average in Friday's trade.

2) Oil prices have stabilized and have taken a break from dragging the loonie to lower levels. June West Texas Intermediate reached a low of $45.93/barrel on March 18 and has since moved roughly $11/barrel higher to current levels of trade, above resistance of the contract's 20-, 50- and 100-day moving averages. A University of British Columbia researcher declared Tuesday on radio that it is official; Canada's currency is a so-called petro-currency with the price of oil the major contributor to market moves in the dollar.

3) Recent economic data released in Canada has been supportive, while there's less discussion surrounding a further interest rate cut by the Bank of Canada.

The attached chart shows the Canadian dollar's exchange rate with the U.S. dollar approaching chart resistance at $0.8374 CAD/USD, a level which would represent a 15-week high and also represents the 38.2% retracement of the move from the July high of $0.9332 to the March 18 low of $0.7781 CAD/USD.

The second study indicates that investors continue to hold a bearish net-short position of 27,051 contracts as of the most recent Commodity Futures Trading Commission data, a position which has fallen 30.7% since early March as the market move tests the resolve of these investors. This is the smallest net-short position held since Jan. 26 data. Despite some banks forecasting a $0.75 Canadian dollar late in the calendar year, the net-short position held by investors reached only a maximum of 39,030 contracts as of March 11, far lower than the net-short of 70,327 contracts seen in January 2014 and the net-short of 75,913 contracts held during one week in April 2013.

Stochastic momentum indicators, seen in the lower study, are approaching overbought territory above 80%, which may slow the move. Should resistance at $0.8375 be breached, a further move to $0.8557 may exist.

As long as this trend continues, watch for weakness in basis levels against U.S. dollar futures and negative impacts to Canada's export sector.

Cliff Jamieson can be reached at cliff.jamieson@dtn.com

Follow Cliff Jamieson on Twitter @CliffJamieson

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