Has the Canadian dollar finally found a bottom? Today’s chart says “probably not.”
Over the past few years, the Canadian economy looks like the inside of an outhouse after the lightning hit. Low oil prices have decimated the nation’s energy industry. The Bank of Canada has resorted to slashing interest rates in a desperate bid to pull the country out of recession.
The results have been disastrous for the USD/CAD exchange rate. Over the past three years, the Canadian dollar has lost more than 30% of its value in relation to the greenback. The decline is evoking painful memories of the 1990s, when the CAD to USD exchange rate plunged to $0.65 versus the U.S. dollar.
Could it happen again? To update our Canadian dollar forecast, let’s take a look at the chart below.
Chart courtesy of www.StockCharts.com
The CAD-USD exchange rate appears to be forming a pennant, a bearish continuation pattern that usually represents only a brief pause in a trending market. They are typically seen right after a big, quick move. The market then usually takes off again in the same direction.
The reason these patterns form is that after a large price movement, the market often consolidates, or pauses, before resuming the initial trend. Think of it like a sprinter catching his breath before preparing for the next dash. Bottom feeders will draw a line in the sand, providing a brief period of support.
But once their buying power is exhausted, the ensuing declines can be awe-inspiring. In the case of the Canadian dollar, bulls are stepping at $0.75. On three occasions now, the market has tested this level, sending prices higher each time.
I’m worried because each rally is weaker and weaker. It’s a signal the bulls are running out of buying power. If we break below this $0.75 level, then you can probably start referring to the Loonie as the Canadian Peso.
The fundamentals for the CAD/USD exchange rate look even worse. The Federal Reserve is scheduled to meet later this week and most analysts expect the central bank to begin hiking interest rates this fall.
While some of this is already baked into the market, higher U.S. interest rates are a big headwind for the Canadian dollar. Why would investors choose to park their money north of the border when they can earn better returns here at home?
How bad could things get? Once a trend is underway, it’s impossible to predict how far it can go. However, I’ve heard folks in the trading community talking about the CAD/USD falling to $0.70, $0.65, even $0.60.
Bottom line: don’t try to call a bottom here.