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Breathtaking is perhaps the best way to describe the Canadian dollar's recent ascent and it has sparked a sense of national pride along the way. The dollar's rapid and explosive rally appeared to have stunned the investing community though. In September when it was trading at about 97 cents (U.S.), the Bank of Canada suggested that it would decline and level out for the rest of the year at 95 cents. On October 30, when the dollar was trading at $1.0495, the Export Development Corporation (EDC) weighed in, suggesting that the Canadian Dollar could swoon to the 85 cent to 90-cent range by the end of next year on lower commodity prices. The EDC reports that every $10-a-barrel price movement in crude prices translates into a three-cent move for the Canadian dollar. So far the government agencies haven't been able to talk the dollar down. Although the dollar has retreated from its Nov. 7 lofty level of $1.1019, what do the technical charts suggest will happen next?
From an Elliott wave stand point, the Canadian dollar appears to have completed a third of a third advancing wave when a shooting star candlestick formed the week ending Nov. 9, as the dollar closed at $1.0635. The shooting star is a bearish reversal signal and the first support level would be found at $1.034, representing a 38.2 per cent retracement of the most recent rally. Additionally at $1.0309 we find a rising window which should offer support.
There are two additional areas of support which could be viewed as buying opportunities. Firstly, a 50 per cent fourth wave retracement to about $1.0276 marks the lower boundary of the positively trending channel and it is also the 10-week MA level making it a strong support level. Secondly, as declining waves alternate in movement and as the second wave was a sideways movement we might expect the fourth to be a very sharp retreat. That in fact, appears to be the dollar's course as Monday November 12 saw the dollar retreat to $1.0381, a 2.54-cent decline from close on Friday Nov. 9. Sharp fourth wave declines tend to retrace about 61.8 per cent of their preceding move thus we could see the dollar retreat to $1.0131.
If we assume that the lows hold at $1.01 then we should witness a rally from that level. At a minimum we should expect the fifth advancing wave to at least equal the first wave in length, thus we could expect it to rally to about $1.1483 over the next three months.
Analyzing at the U.S. Dollar Index we can confirm that it supports a potential $1.14 Canadian dollar.
The U.S. Dollar broke down from a descending triangle in July and then after a return rally move to the breakdown point, the U.S. Dollar swooned to 40-plus year lows at 74.98 cents. With over two months of virtual non-stop declines the U.S. dollar now appears poised to rally to stem its losses. Although its a fresh week, Monday's rally appears to be forming a Harami candlestick pattern, which signals that the immediately preceding trend is concluded. However, we'll have to see how the week plays out, but it could be the beginning of an 38.2 per cent rally would elevate the Dollar to 77.71. If it rallies to the projected target then it will encounter the 10-week moving average and its first resistance point. A 50 per cent rally would take it to 78.55 cents where it would encounter a second resistance level at the 20-week MA.
Since the Dollar's decline witnessed continual breaks below the lower Bollinger band, additional weakness should be expected after the rally. That view is further supported by the fact that the Dollar traced out a bearish descending triangle over a 2-1/2 year period. The triangle's technical measurement suggests a target to 69.49 cents. If the U.S. Dollar reaches the projected target then the Canadian dollar would be trading at about $1.1422 in February based on the current relationship between the two currencies.
Investors holding US currency may wish to look at an investment in CurrencyShares Canadian Dollar Exchange Traded Fund (ETF) to maintain U.S./Canadian dollar exchange value. The E.T.F. is a relatively new one as its inception date is June 21, 2006 and it seeks to track the price of the Canadian Dollar, net of trust expenses.
Dating back to March 2007, the ETF traced out a bullish flag pattern and on Sept. 11, 2007 vaulted out of the pattern leaving 7/8 of a cent price vacuum, when it opened the session at $95.97 to form a rising window candlestick pattern. Rallying further it formed additional rising windows and it didn't look back until it reached $113.02 on November 7. Rising or falling windows are continuation signals and you should trade in the direction of the window.
However, Nov. 7 was a blow off day and the Canadian dollar has since plunged from its highs, leaving a large falling window in its wake. Although the 41-day moving average at $102.10 offers potential support the E.T.F. may continue lower to its next support level which appears to be at the lower Bollinger band at approximately $100.86 and that should offer aggressive investors a buying opportunity.
A renewed rally should follow shortly thereafter with new highs to about $114 into 2008.
Yola Edwards launched her own monthly technical analysis subscription newsletter on October 1 2007. In it, she reviews the outlook for the major North American market indexes, the Canadian dollar, the U.S. dollar, and commodity futures, including oil and gold. As well, she identifies investment opportunities with the potential to generate a minimum short-term return of at least 10%. As an added bonus, interim e-mail alerts will be sent notifying subscribers of any changes to her views.
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Yola Edwards is a contributing writer and technical analyst for Bell Globemedia Interactive, providing options and technical analysis research on a variety of North American equities.