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Breakout In Canadian Dollar Indirectly Suggests Higher Commodity Prices, Stronger US Equities

 

The following is an excerpt from our October 8th Commentary entitled, "Major Breakout In Canadian Dollar Indirectly Suggests Higher Commodity Prices and A Stronger US Stock Market". 

It is offered as a follow-up to our September 16th Commentary (and posting to this website) entitled, "New 2010 Highs In Aussie Dollar, If They Hold, Are Positive For Both Copper Prices And The Dow Transports". 


INTRODUCTION

In our September 16th Commentary entitled, New 2010 Highs In Aussie Dollar, If They Hold, Are Positive For Both Copper Prices And The Dow Transports,  we said:

"This week Aussie Dollar / US Dollar (AUDUSD) is breaking out above major overhead resistance at its 0.9380 November 2009 benchmark high.  This suggests that the Aussie's larger October 2008 major uptrend versus the US currency is resuming.  Considering the tight and stable positive correlation between AUDUSD and commodity prices, and more specifically with economically-influential copper prices, continued strength in AUDUSD would indirectly suggest increasing economic demand and and would portend a similar, upcoming rise in the Dow Jones Transportation Index."

Since our September 16th report AUDUSD has risen by 588 points or +6%, and is in the process of rising above its November 2009 benchmark high (see Chart 1 below).  During the same period COMEX copper has coincidentally risen by 35 cents per pound or +10% while the Dow Transportation Index (DJT) has risen by 212 points or +5%.

Chart 1

In today's report we display another, new bullish breakout by another currency with a commodity-driven economy, the Canadian Dollar, and then discuss its directional implications for the currency itself as well as for the prices of several other related financial assets.

CANADIAN DOLLAR BREAKS OUT FROM 6 MONTHS OF UNCERTAINTY

Chart 2 displays the US Dollar / Canadian Dollar  (USDCAD) cross rate since 2009 along with its (orange) 200-day moving average, a widely-watched major trend proxy.  The red highlights define a chart pattern, a triangle, that has emerged on the chart ever since the US currency bottomed, then began drifting sideways, versus the Canadian Dollar in late April. 

Chart 2

Triangles indicate indecision, in this case 6 months of indecision following the huge decline in the US Dollar versus the Canadian Dollar from its March 2009 peak, and represent a period when investors collectively digested the recent move while trying to determine whether or not the major downtrend (as defined on the chart by the 200-day moving average) would continue.

Most of the time triangles become continuation patterns, which means that they continue the market move that preceded them.  The breakdown through the lower boundary of the pattern on October 5th (red highlights) indicates that this is again the case this time.

This week's bullish breakdown by the US Dollar versus the Canadian Dollar (which equates to a bullish breakout by the Canadian Dollar versus the greenback) initially caught our eye because of what appears to be an unusually attractive risk/reward ratio of better than 5.0 to 1.0

However, as we progressed deeper into this report, inter-market relationships also suggest that a strenghening Canadian Dollar should also be a positive factor in the direction of commodity prices, the Australian Dollar, and in the US stock market.

continued in the Client Area of the Asbury Research website...