The Canadian Dollar has a history of moving higher from mid March to the end of May. Will history repeat this year?
A recent seasonality study by EquityClock.com based on data for the past 20 years shows that the Canadian Dollar has a seasonal sweet spot between mid March and the end of May. On average, the Canadian Dollar has gained 2.0 percent per period against the U.S. Dollar. The sweet spot corresponds to a period when seasonal demand for commodities such as lumber, copper, zinc and nickel as well as manufactured goods such as autos reaches a high. ar Forex (F) Seasonal Chart.
The Canadian Dollar appears poised to move above a tight five month trading range between 92.16 cents and 97.79 cents U.S. Intermediate trend is up. The Canuck Buck recently bounced from its 200 day moving average currently at 92.71 cents U.S. . The Canadian Dollar held its trading range despite a 9.6 percent gain by the U.S. Dollar Index since December. Historically, the Canadian Dollar has traded lower when the ddddU.S. Dollar traded higher. A break above resistance at 97.79 cents U.S. implies intermediate upside potential to 103.75 cents U.S.
A series of events are coming together to trigger a breakout by the Canadian Dollar during its next seasonal sweet spot between mid March and the end of May.
The Canadian economy is recovering strongly. News last week, that fourth quarter real annualized Gross Domestic Product rose by a faster than expected 5.0% rate, confirmed the trend. Growth is coming from greater federal government spending related to an economic stimulus program and from rising demand and prices for commodities including copper, zinc, nickel, crude oil, potash and lumber.
Strength in the Canadian economy and its currency relative to other G8 countries is attracting speculative attention by international investors. The Russian central bank recently noted its intentions to diversify its currency reserves by purchasing Canadian Dollars.
Early technical signs of an intermediate peak in the U.S. Dollar Index have appeared during the past two weeks. Recent strength in the U.S. Dollar Index was triggered partially by weakness in the Euro that, in turn, was triggered by concerns about a possible default by Greece’s debt. At least a temporary resolution of Greece’s financial crisis is likely to be reached this week. The U.S. Dollar Index has a history of peaking each year near the end of March. Technical confirmation of an intermediate peak in the U.S. Dollar likely will be the trigger for a breakout by the Canadian Dollar above the 97.79 cents U.S. level.
The Bank of Canada confirmed last week that monetary policy is expected to remain accommodative until at least the end of the June, but hinted that an easy money policy was approaching an end. Anticipation of a tightening monetary policy in the second half of 2010 will prompt strength in the Canadian Dollar.
What to do
The preferred strategy is to continue to own investments that trade in Canadian Dollars. Investments in securities trading in other currencies also are possible if they are fully hedged against currency risk. Investments in U.S. Dollars are particularly vulnerable if not hedged.
….read more and view the Charts in Don’s Tuesday report HERE.
Don Vialoux has 37 years of experience in the Investment Industry. He is a past president of the Canadian Society of Technical Analysts (www.csta.org) and a former technical analyst at RBC Investments. Don earned his Chartered Market Technician (CMT) designation from the Market Technician Association in 1995. His CMT paper entitled “Seasonality in Canadian Equity Markets” was published in the Spring-Summer 1996 edition of the MTA Journal. Don also has extensive experience with Exchange Traded Funds (also know as Index Participation Units) as well as conservative option strategies. In 1990 he wrote a report that was released in the International Federation of Technical Analyst Journal entitled “Profiting from a Combination of Technical and Fundamental Analysis”. The report introduced ” The Eight Phases of the Stock Market Cycle”, an investment concept that continues to identify profitable entry and exit points for North American equity markets. He is currently a member of the Toronto Society of Fundamental Analyst’s Derivatives Committee. Now he is the author of a daily letter on equity markets available free on the internet. The reports can be accessed daily right here at www.dvtechtalk.com.