Marc Chandler, global head strategist of currency strategy at Brown Brothers Harriman, recently contributed an article to Barron’s in which he lays out the reasons for a substantial Canadian Dollar decline. Chandler cites that purchasing power parity (as determined by the Paris-based Organization for Economic Cooperation and Development) is a little above 81 cents, which is 1.2346 USDCAD, the Bank of Canada appeared to indicate that the door is open to additional rate cuts, and weak productivity growth are some of the reasons for an expected decline.
The fundamental reasons seem valid but what does the chart tell us?
A confluence of lines acting as strong resistance makes a USDCAD long at the current juncture risky. A former support line drawn off of the November 2004, May 2006, and July 2007 lows is now resistance as is the line drawn off of the March 2007 and August 2007 highs. Until the USDCAD breaks through this level, significant downside risk remains.
The rally from .9055 to 1.0248 is not especially clear in terms of wave structure. In truth, the rally could be counted as either a correction or impulse. However, the decline from 1.0248 to .9755 is clear and is in 5 waves, indicating that the next larger move is down. A bounce to the 61.8% of the recent decline at 1.0060 is likely but that would present a high probability sell opportunity against 1.0248. The bearish target is near .9500, which is structural support and the 61.8% of .9055-1.0248. If the .9055-1.0248 rally is the first leg of a larger bull move (CAD bearish move), then support should be strong at .9511.
In summary, the bigger technical picture is in agreement with a weakening Canadian dollar, but not before a dip that ends near.9500. From a strategic point of view, one option (if you are long term bullish the Canadian dollar and believe that a multi-year bottom is in place) is to scale into a position until .9500 with a stop below the .9055 low. Another option is to play a break above 1.0248 (place buy orders above 1.0248) or be patient and hope that you get the chance to buy near .9500. As the pattern progresses, we will be better able to measure the longer term bullish potential.