The Futures / Inter Market Report

Trading the World’s Markets 

March 14, 2008

Matthew Caruso, CMT                                  
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Canadian dollar to strengthen

            The U.S. dollar weakness has definitely been a conversation piece in recent months. Virtually every currency has appreciated versus the U.S. dollar including the Canadian dollar. In recent weeks the Canadian dollar has been consolidating and building a base and now appears to be ripe for a breakout to the upside.

            I would like to first draw your attention to figure 1. I have shown the 44 weeks cycle that is present in the Canadian dollar with vertical blue lines. As you can see, we are due for a major bottom when looking at this cycle. As well, momentum has now turned up from an over sold position as indicated by the oscillator in the lower part of the chart. What is most important about the Canadian dollar is that it is oversold in an uptrend, which is very different from being oversold in a downtrend. Trend is the number one factor in considering what and when to trade.

 

Figure 1 Chart by metastock

            Of course we are going to study more than just the cycle alone. We need further confirmation. The next indicators we will look at are commercial net positions and seasonality. If you study figure 2 you will see a very repetitive and reliable pattern in the Canadian dollar. There is usually a strong bottom in March and a strong bottom in July as you can see in the seasonal pattern shown in the bottom panel of the chart. However, a seasonal bottom is not present every year and therefore cannot be used on its own. However when commercial traders have the largest long (or smallest short) position that they have had in months when it is a seasonal bottom, it is very bullish as you can see by the 3 red ovals in figure 2.

 

Figure 2 chart by genesisft.com

            Lastly, I want to study the current price pattern in figure 3. It appears to me that the Canadian dollar is forming a head & shoulders bottom and may rally at least to its all time high and possibly higher. In order for this to be confirmed, we need price to climb above the recent intermediate high above the H&S neckline.

            There is one thing that I would like to see that would help create an even more bullish scenario. The one aspect that I don’t like about the Canadian dollar is how it is lagging other currencies like the Australian dollar. However as we recently saw with the British pound, a breakout may turn a lagging currency into a leading one. A breakout above the neck line would be very bullish and the Canadian dollar needs that to confirm its bullish setup.

Figure 3 chart by genesisft.com 

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