Analysis

Traders are looking for the September Canadian Dollar futures to open higher this morning. There may not be any major fundamental news driving this market higher this morning, but nonetheless traders like the long side. The main driving force behind this rally seems to be technically driven as many indicators have reached oversold levels.

On June 1 this contract topped at .9275. This high capped a huge rally that began on March 9 at .7700. The entire rally coincided with the rally in equities and commodities and clearly demonstrated investor desire for higher yields.

As equities rallied along with gold and crude oil, traders sold U.S. Dollars and bought Canadian Dollars. Another reason for the rally was that the Canadian economy seemed to be in a better position to recover than the U.S. economy. The Canadian banking system was certainly not as devastated by the credit crunch as much as the U.S. system and the Bank of Canada had not pumped that much stimulus into the economy.

As the U.S. Dollar was facing weakness because of the threat of inflation, the Canadian Dollar was not expected to face such a threat. In addition, the Bank of Canada only threatened quantitative easing while the Fed spent billions trying to keep interest rates down. Clearly the Canadian Dollar looked like the better of the two currencies.

Around June 1, the Bank of Canada began expressing concerns regarding the rapid rise in the Canadian Dollar. It felt that the rise in its currency would hurt the export market which is a major component of the Canadian economy. At this time speculators began to lighten up positions in anticipation of action by the Bank of Canada. Some assumed that the BoC would intervene while others thought the BoC would enact quantitative easing to try to boost the economy. Whatever the reason, speculators began liquidating and the market began a short-term correction.

Recently this market began to slow down its rate of decent despite lower gold, crude oil and equity markets. This was a sign that the buying was becoming greater than the selling.

Technically, this market is currently finding support at 50% of the April low at .8000 and the June high at .9275. If this market establishes support at this level of .8638 then traders should start to look for bottom pickers to begin to trigger the start of a short-covering rally which could take the September Dollar back to at least .8855 to .8923 over the short run.

Daily Chart

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