The Canadian dollar traditionally moves higher from the middle of March to the end of April. What are prospects this year?
The Canadian dollar is about to enter into a period of seasonal strength relative to the U.S. Dollar. According to EquityClock.com, the period of seasonal strength for the Canadian dollar is from March 22 to April 30. The Canadian dollar has advanced in 24 of the past 36 seasonally strong periods. Average gain per period was 0.73 per cent. Gains during the past 15 periods have been particularly impressive. The Canadian dollar has advanced in 12 of the past 15 periods for an average gain of 1.58 per cent.
Strength in the Canadian dollar in April and May is triggered by greater seasonal demand for Canadian-produced commodities, such as crude oil, metals, and grains. Commodity prices in the energy, metal, and agriculture segments currently are in intermediate uptrends. Higher prices into spring remain likely.
What about this year? A key influence this year is anticipation of results from the Quebec provincial election on April 7. A majority win by the Parti Quebecois will raise concerns about the possibility of another election on Quebec sovereignty. The Canadian dollar likely will remain under technical pressure until results of the provincial election are known and intentions of the next provincial government are revealed. Accordingly, favourable seasonal influences likely are delayed slightly this year.
On the charts, the Canadian dollar has been in a long-term decline since September, 2012. However, evidence of a short-term bottom has become apparent. The Canadian dollar has fallen from near par (CAD$1.00/USD) versus the U.S. dollar at the beginning of 2013 to just below CAD$0.90/USD, trading the furthest below its 200-day moving average since October, 2011. Oversold momentum indicators triggered at the end of January suggest that downside pressures were temporarily exhausted, leading to a sideways move in the currency since the beginning of February. Support is identified at CAD$0.89/USD. A breakout above resistance at CAD$0.9129/USD would suggest the conclusion of the consolidation period. Upside pressures could be enhanced when traders unwind negative bets on the currency.
Strength in the Canadian dollar is an important consideration when investing in North American equity markets. In April and May, Canadian investors will want to avoid the purchase of U.S. equities, funds, and ETFs unless they are hedged against currency risk. Canadian investors also will want to focus on Canadian equities in the commodity sector that trigger strength in the Canadian dollar. Canadian energy and material stocks have a history of moving higher during April and May.
Investors have an alternative to buying futures contracts based on the Canadian dollar in order to take advantage of the seasonal phenomena. Investors with U.S. dollars can invest in the Currency Shares Canadian Dollar Trust (FXC-NYSE). The exchange-traded Product (ETP) tracks the price of the Canadian dollar. Management Expense Ratio is only 0.40 per cent.
Don and Jon Vialoux are authors of free daily reports on equity markets, sectors, commodities, and Exchange Traded Funds. . Daily reports are available at http://TimingTheMarket.ca/ and http://EquityClock.com. They also are Research Analysts for Horizons ETFs Management (Canada) Inc. All of the views expressed herein are their personal views although they may be reflected in positions or transactions in the various client portfolios managed by Horizons ETFs Management (Canada) Inc.