"Canada Dollar May Rebound to a 3-Year High, RBC Says: Technical Analysis"
Garth Theunissen, Bloomberg, March 21, 2011.
Canada's dollar may strengthen to the highest in more than three years versus its U.S. counterpart as last week's slump toward parity with the greenback loses momentum, RBC Capital Markets said, citing technical charts.
The loonie, as the currency is know for the aquatic bird on the C$1 coin, may reach a "descending channel base" of 96.45 cents per U.S. dollar should it close stronger than 97.75 today, strategist led by George Davis, chief technical analyst at RBC Capital Markets in Toronto, wrote in a client note today. An exchange rate of 97.75 Canadian cents per U.S. dollar would be the strongest since November 2007.
"A daily close below 97.75 would suggest that corrective potential in USD-CAD is beginning to erode," RBC Capital Markets said in today's note. "Upward price momentum is eroding, exposing the low at 96.67 and the descending channel base at 96.45 as the next downside price levels to watch."
Canada's dollar declined the most in more than four months last week, trading as weak as 99.74 on March 15, as the threat of a nuclear power-plant meltdown in Japan damped investors' appetite for higher-yielding assets. The loonie rallied the most in almost seven weeks today as prices of oil, Canada's biggest export, rose on concern political turmoil in North Africa and the Middle East may disrupt crude supplies.
RBC's "medium-term technical price target" for the Canadian dollar was 97.15, and the currency would have to close weaker than 98.29 to "negate" the bank's prediction for recovery.
Canada's dollar gained 0.7 percent to 97.75 cents per U.S. dollar at 11:35 a.m. in New York.
Analysis of this Bloomberg Report
BACKGROUND
The value of the Canadian Dollar, abbreviated $C or CAD and known as the "loonie", is most often measured relative to the US dollar or USD, which is known as the "greenback". In the 1990s, the CAD was declining relative to the USD due to declining demand for commodities and due to American interest rates being higher than Canadian interest rates. In the early 2000s demand for commodities began to increase internationally, causing the CAD to appreciate. (More than 40% of Canadian merchandise exports are commodities, with oil representing 12%.) In the last few years, financial problems and recession in the US means that international savers are more interested in buying Canadian financial products relative to US financial products, which also appreciates the CAD. Currently, the CAD is around par with USD, sometimes surpassing the value of the USD.
SUMMARY (COLLOQUIAL TERMS)
Looking at how the exchange rate has moved in the past, the chief statistician at RBC Capital Markets predicts that the value of the Canadian dollar relative to the American dollar will bounce back again this week, achieving its highest value in more than three years.
Last week foreign buyers seemed to lose interest in the Canadian dollar because of the nuclear crisis in Japan. In serious crises, people still tend to prefer the US dollar because it is the mostly widely accepted currency and is printed by a very powerful country with a very large economy. When people sell Canadian dollars and buy US dollars, our dollar becomes less valuable compared to the US dollar, and we have to pay more for each US dollar. But this week is another story. Political crises in North Africa and the Middle East have people worried that these regions will become unable to supply their usual amounts of oil, and so the price of oil is going up. This makes people want to buy more Canadian oil, and so they buy Canadian dollars with which to buy the oil. Because of this, the Canadian dollar is now rising in value compared to the US dollar. Our exchange rate is becoming more favourable. Today the Canadian dollar appreciated more than it has in seven weeks.
Based on past statistical patterns, the RBC analyst believes that, if the Canadian dollar appreciates enough today, to the point where Canadians have to pay only 97.75 cents per USD, then the Canadian dollar will probably continue to appreciate until the exchange rate is down to 96.45 cents USD.This is better than expected. Even if does not fall all the way to 97.75 cents, so long as it falls to 98.29 cents, things are looking good.
SUMMARY (ECONOMICS TERMS)
Based on past trends, the chief technical analyst at RBC Capital Markets predicts that the Canadian exchangerate will achieve its lowest level in more than three years very soon.
Last week the loonie depreciated because of a rush to American dollars in the wake of the nuclear crisis in Japan. The higher interest rate available in Canada was temporarily disregarded. This week, however, oil supply concerns are uppermost and the Canadian dollar is appreciating today more than it has in seven weeks.
If the exchange rate falls below 97.75 USD today, the loonie will probably continue to strengthen, achieving a level of 96.45 in coming days or weeks. This is better than the medium term prediction of 97.15. Even if the exchange rate falls only to a level above 98.29, the loonie is still likely to appreciate relative to its value last week.
CRITIQUE
This article does not display any theoretical bias, as it is mostly concerned with the market price of the Canadian dollar and makes no policy prescriptions. It attributes movements in the Canadian dollar to commodity prices, interest rates, and people's flight to US assets in the face of crises. This is uncontroversial.
The article is too technical to be understood by those not versed in advanced statistical analysis. The reporter himself does not seem to know what some of the terms mean, as he tends to put quotation marks around them. It would be helpful if he added an explanatory phrase behind "descending channel base" and "medium-term technical price target".
The reporter does not explain why a nuclear crisis would make people reject "higher yielding assets". Don't people like high yield in emergencies? It's not that people want low yielding assets during emergencies, it's just that people want American assets during emergencies, even now, when American assets are providing low rates of return. The reporter does not make this clear. Articles like this do not contribute to economic literacy.
Last week a nuclear crisis, this week an oil supply crisis: the wise reader will not put too much faith in the analyst's predictions. The real world is constantly changing in unpredictable ways.