The Canadian dollar is about to enter its strongest period of seasonal strength of the year: mid-March to the end of May. On average during the past 20 periods, the loonie has gained 2.0 cents per period.
This year, the Canadian dollar has been under considerable pressure since mid-January, when it reached 1.0189 cents. Our currency has been hit by a series of discouraging Canadian economic news, including a 16 per cent drop in existing home sales in February, a 2.1 per cent decline in December retail sales and a slowdown in Canada's gross domestic product in the fourth quarter.
Not all of the economic news has been gloomy: Canada's trade balance improved in January. Employment in February surprisingly rose by 50,700. Canada's banks reported record fiscal first-quarter earnings.
By far the most important reason for weakness in the Canadian dollar since mid-January has been strength of the U.S. dollar relative to the currencies of all developed nations. Currency investors have been attracted to notable signs of economic improvement in the U.S. economy in the first quarter.
The Canadian dollar reached a short-term bottom last week. It broke above a short-term reverse head and shoulders pattern on a break above 97.78 cents (U.S.). The loonie also moved above its 20-day moving average. Upside potential during the current period of seasonal strength is to par, where its 200-day moving average currently stands.
What could trigger strength during the next few weeks? Traditionally, Canada's exports increase in the second quarter including exports of potash, grains, coal and base metals. Add exports of crude oil to that list. Canada exported a record amount of crude oil in February. Also, favourable anticipation of news on the Keystone pipeline could help. A peaking in the U.S. dollar from overbought levels relative to other major currencies also will play a role.
Investors with U.S. dollars can invest in an ETF that tracks the Canadian Dollar: CurrencyShares Canadian Dollar Trust (FXC)