Canadian investors and the USD

September 26, 20226 Comments

A reader asked me for my view on the Canadian dollar specifically, and also for my view on the USD (DXY), which is the relative price of the USD vs a global basket of currencies. I haven’t covered that recently, so I thought this readers question was a worthy topic to explore. Particularly if you have some USD exposure in your investments.

USD (DXY)

Lets start with the macro (long termed) view of the USD vs the world basket of currencies. The chart below goes back to 1972. Note how prior resistance near 100 was cracked this year, resulting in a parabolic upside move to the current level of around 112. Remember that the USD is still the worlds “reserve” currency – its the go-to when times are uncertain. Its the flight-to-safety when all around is dark. That’s pretty much the story these days, isn’t it? Despite the parabolic overbought appearance of this chart, there is little to stop the rally until somewhere near 120. A resolution of the war in Ukraine and a pullback in worldwide inflation might reverse the direction. But no signs of these potentials appearing yet.

Seasonal trends are only likely to add to the upside as we enter into a strong period from October to March for the greenback.

Not surprising to see that sentiment is overly bullish on the USD. The sentiment optix, below, shows us that such high levels of enthusiasm can last a while before we see any kind of meaningful decline in the currency from a high level.

 

Canadian dollar

You’ve seen me post this chart below. The C$ is just now coming into major support near 0.72 vs. the USD. These lines horizontal were drawn on this chart many years ago and posted on my blogs – and they continue to offer good predictability as support/resistance zones. So there’s a decent chance that $0.72 will hold. However, if it doesn’t, look to $0.68 as the next stop.

Seasonality turns bearish as September ends for the loonie. Like the bird, it tends to head south for much of the winter. Keep that in mind – especially given the further upside potential on the USD before it hits resistance near 120. This might imply that a break in the C$ chart of $0.72 will lead into a quick decline to $0.68.

 

 

Sentiment is becoming oversold for the C$, but – like we saw with bullish USD sentiment – that can last a while before we see a reversal to the upside happens. So I won’t count the bearish opinion on the loonie as a positive just yet. Given that the CC$ needs a strong oil price, I’d think we need to see that happen before the loonie can offset any USD strength.

 

Conclusion

The USD has a parabolic market chart, yet no meaningful resistance to stop that runaway train in the near-term. Seasonality trends are strong for the USD yet weak for the C$ in the coming months. And then there’s that flight-to-safety pressure that always gives the USD some wings. Sure, its obvious that the greenback is overbought. And that will need to reverse.  We likely need some encouraging news on inflation and world events to see that reversal.

Canada needs a renewed bid on oil to see strength in its currency. Perhaps that will happen if Russia moves hard over the winter against the Ukraine – as says the research intel I have read. That, and when (not if) Biden is forced to re-stock the US Strategic Petroleum Reserves/ SPR – which he has nearly drained to keep gas prices low for political optics coming into the mid-terms. Who says politics don’t matter when you invest?

All in, I think that the USD has a few more bullish months left before the inevitable overbought reversal occurs. Meanwhile, keep an ear to the ground on the war in Ukraine and the move by the US government to re-stock the SPR. These events will likely inspire higher energy prices, which will be good for producers and good for the loonie. Until then, there’s nothing to derail the USD train

6 Comments

  • Thank you! What a surprise and pleasure to see a specific post. I’ve the same levels in mind but the timing is always the tricky part of the equation.

    Reply
  • However, the high oil prices recently haven’t seemed to helped the Canadian dollar much. Will it this time if oil goes back up.

    Looking at the S&P chart I see a good chance for a bounce in the coming days as we approach the 200 week moving average with what appears to be Rsi divergence on the weekly chart.

    Perhaps a chance to raise some more cash before the market gets even worse?

    Reply
    • Dave its hard to say, I would refer to the market support/resistance levels noted in my “Outlook” blog last week. So long as 3600-ish holds, I might think we are basing. If that’s the case, then a rally could be sold, and rebought on a dip. Base formations are up/down swing patterns of one sort or another.

      Reply
  • Hi Keith,

    I want to buy the S&P500 in Canadian dollars; Canadian is low now, is it better to buy the hedged or unhedged S&P 500? Thank you.
    Sam

    Reply
    • Can’t advise you on buying or selling, but my neartermed outlook is for a bit more upside on the USD (mind you, it could pull back a bit in the very short term). But a few months out, my view is for a peak in the USD per my analysis on this blog.

      Reply
  • YOU WERE RIGHT IN SAYING THAT CANADIAN DOLLAR IS GOING DOWN TO .68 CENTS. IT SHURE IS GOING THERE FAST!

    J.P.

    Reply

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