Canadian Dollar: Expect A Strong Comeback In 2019

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Includes: CADS, FXC
by: Sandeep Singh Ahluwalia
Summary

The ratification process of the United States–Mexico–Canada Agreement may pose a risk to Canadian Dollar bulls.

A rise in Canadian oil sales will boost the value of the loonie.

I am leaning towards the Canadian Dollar bulls being in the driver's seat.

The Canadian Dollar (FXC, CADS) had a choppy and turbulent 2018, resulting in it having two steps up and one step down. This was primarily due to the unpredictable trade talks between America and Canada coupled with the falling oil prices. Moreover, this resulted in the domestic economic indicators being overshadowed even though they were performing excellently. However, in 2019 I expect the Canadian Dollar to make a strong comeback which will result in it rising across the board. Hence, to ascertain the likelihood of this occurring, I will look at the fundamental news affecting the pair, whilst also analyzing the charts using technical analysis tools.

Fundamental news:

United States–Mexico–Canada Agreement (USMCA):

The USMCA is one of the key risks facing the Canadian Dollar in 2019. I say that as the new trade agreement may have been signed by the leaders of the relevant nations, but it still needs to be ratified. Thus, the risk to the Canadian Dollar arises from the fact that the Democrats who recently won the House of Representatives may not be in a hurry to do so. Hence, this may result in the NAFTA agreement being cancelled, whilst the USMCA is still not ratified. This in turn would pose a serious threat to the Canadian economy and the loonie. Hence, I believe it is a factor that investors should keep a keen eye on.

Elections:

One of the key factors that I believe will affect the Canadian Dollar in 2019 is the upcoming elections in October. The reason I chose to highlight this is because the market will be hoping that Prime Minister Justin Trudeau gets re-elected as it will symbolize stability and continuation. This is as he is seen as a leader who is pro-trade and has been popular for his broadminded thinking across the world. Thus, due to this I expect the Canadian Dollar to rise if the Prime Minister were to win as expected. Moreover, I expect the Loonie to have a strong growth trajectory up until the election due to election-economics. This is as any government that is about to face elections tends to loosen its purse strings so as to woo voters. Thus, I expect there to be a touch of extra generosity from the Prime Minister in 2019. This in turn will give the Loonie’s bulls a shove in the right direction.

Bank of Canada:

Bank of Canada’s governor Stephen Poloz is an individual who reacts to good and bad news actively and in a proportionate manner. However, the current bias of the Bank of Canada is hawkish, which signals to investors that there will be further rate hikes in 2019. However, I believe the pace of the hikes will be heavily dependent on the inflation rate. Thus, I believe it will critical for investors trading the Canadian Dollar to keep track of the speeches made by BoC’s Governor Stephen Poloz and Deputy Governor Carolyn Wilkins. This is as any shift in their opinion will trigger a volatile move across the board for the Canadian Dollar.

Canadian Oil:

Global oil prices have fallen sharply in the latter part of 2018 which has left many investors worrying about the future prospect of this precious commodity. However, I believe this fall in oil prices provides Canada with an opportunity to shine. I say that as Canadian Crude in 2018 has traded at a heavy discount against WTI Crude. This spread in prices was due to numerous bottlenecks Canadian drillers faced. This is as limited pipeline capacity and rising U.S. shale production levels made it harder to ship Canadian oil to ports in the Gulf of Mexico. However, I believe this problem will reduce in 2019. This is as lower global oil prices will force some U.S. shale drillers to halt production in unprofitable rigs. This in turn will reduce the level of competition in North Dakota and the Permian Basin, which will ensure that Canadian oil gets more pipeline space.

Technical analysis:

Price History:

Canadian Dollar Price History To say 2018 was a choppy year for the Canadian Dollar will be an understatement. This is as in 2018 the Loonie had lots of ups and downs which fell between the range of 10% and 11%. However, we saw the overall trend being negative as the Canadian Dollar commenced the year at 0.8100 but ended the year at 0.7346. The year commenced on a positive note due to rising oil prices and the hope of an expansion in the Canadian economy. However, things went south after President Trump placed tariffs on Canadian aluminum and steel. Moreover, the situation was worsened due to several hiccups faced in the negotiation of the new trade deal. This in turn placed bearish pressure on the Canadian Dollar which resulted in it shedding roughly 10% of its value in 2018.

Weekly chart:

Canadian Dollar Weekly Chart The currency’s weekly chart indicates to traders that the Canadian Dollar will be having a bullish reversal in the first few months of 2019. This is due to the formation of a ‘Bullish Harami’ candle pattern. This candle pattern indicates to investors that the tide of the market has changed from one in which the bears were in control, to once in which the bulls are calling the shots. Moreover, the bulls received further confirmation as the past few candles have broken below the Bollinger band pattern. This signals to traders that the bearish rally has stalled and that a bullish reversal is on the cards.

On the price target front, I expect the Canadian Dollar to rise till the range between the 127.2% and 161.8% fibonacci resistance levels. The 127.2% fibonacci resistance level is at 0.7670, whilst, the 161.8% fibonacci resistance level is at 0.7761. However, I expect the currency to face some resistance between the 50% and 61.8% fibonacci resistance levels which will cause the Loonie to enter a box range temporarily. The 50% fibonacci resistance level is at 0.7466, whilst, the 61.8% fibonacci resistance level is at 0.7497.

On the indicator facet, the RSI of the Canadian Dollar has commenced an ascent which has resulted in it breaking above the 35 mark. This supports my notion that the Canadian Dollar will be rising till the range between the 127.2% and 161.8% fibonacci resistance levels. Furthermore, the ADX has turned flat, thus, signalling to investors that the bearish trend has stalled.

The big picture:

Overall, I am leaning towards the bulls pushing the value of the Canadian Dollar to the range between 0.7670 and 0.7761. This is driven by the fact that the technicals support an ascent in the currency’s value till that point. However, whichever way you do decide to trade, do ensure that you utilize trailing stops, as this shall aid in capital preservation.

Good luck trading.

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.