Canadian Dollar: Look For A Breakout

| About: CurrencyShares Canadian (FXC)

Summary

The Canadian dollar has traded in a very tight range for many months now.

It declined significantly during the gold bear market and the oil price collapse, but bottomed in January and rallied off of that low.

The Canadian dollar has traded within a broad range for over 60 years. The $0.70-$1.00+ range is likely to hold, so there is much more upside than downside.

With gold in a new bull market, the fundamentals also point to much more upside than downside for the loonie.

My preferred way to play the upside of the Canadian dollar is to invest in quality gold mining stocks that trade on the Canadian exchanges.

As an investor and analyst of junior gold mining stocks, many of which trade on the Toronto Stock Exchange or the TSX Venture Exchange, I have to follow the Canadian dollar exchange rate every day (CurrencyShares Canadian Dollar Trust ETF (NYSEARCA:FXC)). In doing so, I have noticed that the CAD/USD rate has traded in a very tight range for many months now:

Click to enlarge

The rate has remained in the tight 0.75-0.78 range for many months now, and it hasn't made a really big move since the rally from January to April.

A look at the CAD/USD rate on a longer time frame gives us a broader perspective:

Click to enlarge

The Canadian economy is heavily tied to mineral resource extraction, from oil & gas to gold & silver to base metals, so it is no surprise that the value of the Canadian dollar declined significantly during the gold bear market and the oil price collapse.

Note in particular the capitulation selloff in January and the sharp rally off of that low. Just like we saw with gold and oil, this strongly suggests January was the long-term bottom in the Canadian dollar. Breaking below $0.70 was simply too low, and the market reacted accordingly.

I always like to look at extremely long time frames whenever possible to gain historical perspective. The following chart shows the Canadian dollar to US dollar exchange rate going all the way back to 1953:

Click to enlarge

The point here is that the Canadian dollar has traded within a broad range for over 60 years. It has not been in a long-term historical downtrend like many weaker currencies.

The highs of 2007-2008 and 2011-2012, when a Canadian dollar was worth more than a US dollar, were just as strong as the old highs of the 1950s and the early-mid 1970s.

The low of this January looks very similar to the low of 1986 - both around $0.70, both occurring together with oil price crashes.

The point is, the $0.70-$1.00+ range appears very likely to hold, which means that the Canadian dollar has a lot more upside than downside.

With gold in a new bull market and oil having already gone through its bottom in February and rallied, the fundamentals also point to much more upside than downside for the loonie.

My preferred way to play the upside of the Canadian dollar is to invest in quality gold mining stocks that trade on the Canadian exchanges. (For some examples, see my articles here and here.) When you buy them in US dollars as an American investor, but they trade in Canadian dollars, you make gains as the Canadian dollar rises. That adds currency leverage to the already powerful leverage of miners to the gold price.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.