Good News for the Canadian Dollar?
The performance of the Canadian dollar has been so ugly, the tide wouldn’t take it out.
After a long period of disappointing performance, people start to give up on an asset. Mention the market around the water cooler and faces will cringe. Editors know the topic will gross out readers, so you will stop seeing it mentioned on magazine covers.
It’s in situations like these, however, that you can scoop up assets for a fraction of their real value. In this kind of bad condition, you can often see stocks and markets trading for pennies on the dollar. If any optimism returns, investors can double or triple their money overnight.
This is the situation we’re seeing in the Canadian dollar right now.
Since 2012, speculators have been pulling money out of the Great White North. Low commodity prices have crushed the nation’s resource-dependent economy. A sudden shift toward left-wing governments has also made investors nervous.
Needless to say, this has left the CAD to USD exchange rate about as down in the dumps as you can get. But the question is this: has the Canadian dollar finally bottomed?
To answer that question, we need to consult the charts.
Chart courtesy of www.StockCharts.com
During the selloff, the CAD to USD exchange rate exhibited the classic bump-and-run pattern.
During the lead-in phase, prices declined in an orderly manner. There’s no excessive speculation, as investors pared down rates in response to worsening fundamentals.
Next comes the bump phase. Retail investors start selling off prices beyond reason. This is when you start to see the Canadian dollar mentioned on the nightly news or on the front page of the paper.
Finally, comes the run. Huge short positions leave the market exposed to a sudden reversal. Without a steady stream of new sellers to push down prices, any bids result in a massive short squeeze.
How far can prices fall? In a typical bust, it’s not uncommon to see prices fall all the way back to the beginning of the lead-in line. Markets need to overcorrect to the upside in order to wash out all of the speculators.
In the case of the Canadian dollar, this would see prices fall to around the US$0.85 level. That would be welcome news for bulls. Based on this, at least, the CAD to USD exchange rate could be nearing a bottom.
This is not a recommendation to run out and buy Canadian dollars, though. Rather than trying to catch a falling knife, investors should wait for the market to carve out a bottom and resume a new uptrend. If that happens, a run to US$0.78, US$0.80, even US$0.85 would not be unsurprising.
The bottom line: the worst is over for the Canadian dollar.