Canada Dollar Signals Reverse to Worst Start: Technical Analysis

The Canadian dollar’s rebound from its worst start to a year since at least 1972 may persist as speculators cash out near record bets against the currency, according Royal Bank of Canada, citing technical measures.

Today’s gain pushed the loonie’s relative strength index out of oversold territory for the first time in 15 days after the currency fell past C$1.12 per U.S. dollar for the first time in 4 1/2 years on Jan. 31. Data from the Commodity Futures Trading Commission showed last week that hedge funds and other large speculators decreased bets against the currency.

“We failed to stay above the C$1.12 level, and I think people got a little bit nervous and started taking profit on their short-Canada positions,” George Davis, chief technical analyst for fixed-income and currency strategy at RBC, said by phone from Toronto. “We’re overdue for at least a bit of a corrective pullback that would start to bring the valuations back to more acceptable or more neutral levels.”

The loonie, as the currency is known for the image of the waterfowl on the C$1 coin, gained as much as 0.8 percent before gaining 0.3 percent to $1.1064 per U.S. dollar at 1:02 p.m. in Toronto. It fell 4.5 percent in January. The 14-day relative strength index rose to 38 after the longest stretch below 30 since October 2008. Readings below 30 indicate the currency may have depreciated too far, too fast.

If the loonie closes stronger than C$1.1030 per U.S. dollar, it could continue gaining to C$1.0854, Davis wrote in a note to clients today. A close weaker than C$1.1235 would open the Canadian dollar to further losses, he wrote.

In technical analysis, investors and analysts study charts of trading patterns to forecast changes in a security, commodity, currency or index. A short is a bet an asset will decline in value.

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