Canadian Currency May Erase Gains, RBC Says: Technical Analysis

Canada’s dollar may reverse a trend and erase five weeks of gains if it weakens past a key technical level, according to Royal Bank of Canada.

The currency may reach C$1.0958 per U.S. dollar, the weakest since June 5, if it depreciates past C$1.0801 at closing, George Davis, chief technical analyst at RBC Capital Markets in Toronto, said. The loonie, as the Canadian currency is called, slumped July 11 the most in almost four months after data showed an unexpected drop in jobs in June. The Bank of Canada will make its next policy decision July 16.

“We do think the risks are going to be toward a dovish central bank and toward Canadian-dollar weakness,” Davis said today in a telephone interview.

The loonie, nicknamed for the image of the aquatic bird on the C$1 coin, appreciated 0.1 percent to C$1.0722 in Toronto trading after earlier losing 0.1 percent. It sank 0.8 percent July 11, the most since March 19, after Statistics Canada said the economy lost 9,400 jobs last month, versus a Bloomberg survey’s forecast of a gain of 20,000.

Hedge funds and other large speculators turned bullish on the loonie at the start of July after 70 weeks of wagers against it, data from the Commodity Futures Trading Commission showed, as the consumer price index exceeded the Bank of Canada’s 2 percent inflation target for the first time in more than two years. The currency reached C$1.0621, the strongest in six months, on July 3 amid bets a growing economy would improve prospects for the central bank to raise interest rates. The loonie gained 2.7 percent from June 5 to July 3.

Triggering Correction

“While the July 3 close below C$1.0653 caused us to shift from bullish to neutral, we did not adopt an outright bearish view for U.S. dollar-Canadian dollar due to the fact that the daily studies had moved to their most oversold levels since 2012,” Davis wrote in a client note of the firm’s view on the greenback. “Friday’s weak Canadian employment data corroborated our concerns by triggering a long-awaited correction.”

A close below C$1.0629 would reassert the bullish trend for the loonie, he wrote.

In technical analysis, investors and analysts study charts of trading patterns to forecast changes in a security, commodity, currency or index.

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