steve.jarvis's picture

Is the Canadian Dollar starting to enter a period of corrective weakness?

It was only a few weeks ago that the ranking order of the major Currencies could almost be read from West to East. The US & Canadian Dollar's were top, followed by Sterling, then the European Currencies and finishing off with the Yen, Aussie & Kiwi Dollars.  However, there has since been a shake up, with rapidly falling Oil prices having been a key factor in establishing a new pecking order for the major Currencies.  

Our Economists have been warning for a while that the Norwegian Krona and Canadian Dollar would be among the biggest casualties of a continued weakening of the Oil price, and evidence of a multi-week trend change for the Norwegian Currency was noted two weeks ago when we downgraded it's overall trend from bullish to neutral, with a trend reversal (to bearish) confirmed last week.

With the exception of USD/CAD (see chart to left) which has been bearish for the Canadian Dollar for several months (due to overwhelming US Dollar strength), as recently as last week the Canadian Dollar was still in an unequivocal medium-term uptrend against most other major Currencies, including the Euro, Sterling, Yen and Aussie.  One week on and the Canadian Dollar appears to be in the process of building a multi-week top pattern against many major Currencies, which could be followed by a period of at least several weeks and possibly a few months of broad Canadian Dollar weakness before its longer-term bullish trend attempts to resume.  However, beware of an initial increase in volatility, including the possibility of a rally back towards recent highs, before a top pattern is confirmed or fails.

Left - USD/CAD - click for enlarged chart

We see the best chance of a retest of recent highs coming against the Euro (see the bottom left chart) and the Swiss Franc (where a multi-month channel has only just been exited), also against the Australian Dollar where there has so far been a failed attempt to break above former AUD/CAD support at just over current markets levels.  Canadian Dollar weakness could continue to be most significant against the US Dollar over coming weeks, whereas it seems least likely to deteriorate against the Norwegian Krona which currently looks to continue being be the weaker of the two.

Above left, middle & right  - EUR/CAD, AUD/CAD & CAD/NOK.  Click for each chart for an enlarged version.