Canadian investors holding US stocks have felt the pain of a rising loonie since the beginning of this year. Both rising commodity prices – which strengthen our petrocurrency – and a weakening of the USD in world currency markets – put significant pressure on the Loonie/USD exchange. The USD lost about 7% since January on a world currency exchange basis, and closer to 12% against the Loonie over that same period.
We at ValueTrend experienced some negative side effects of this change. Our equity platform performance is reported on an after-conversion basis – so our USD stocks fought a double-digit currency draw-down over the past 4 months. While we did cut our USD holdings in half early this year (from about half to about a quarter of the portfolio), the US stocks we held certainly pushed against some otherwise positive stock performance. I’m sure that many of my readers are in similar positions when viewing their CDN$ value of US holdings since January.
The question now is – will the Loonie continue rising, continuing to put pressure on the converted value of our US stocks – or is it going to settle soon? Today’s charts may help offer guidance on the future direction of our loonie vs. the USD.
Chart number one (above) is that of the USD vs. a world basket of currencies. I’ve shown this chart before on this blog. In fact, I’m happy to say that I predicted the USD to reach current levels more than a year ago – and offered the same technical points shown on this chart as my estimated target zone. That was one of the drivers behind ValueTrend reducing our USD exposure a few months ago. As noted on the chart, the USD is likely to be contained within my aforementioned resistance zone of 93-100 (world currency index units). At this time, the USD looks to be bouncing off of the bottom of that range from an oversold level. See the neartermed chart of the USD below. This suggests the potential for a return to the top of the range–which represents about 6-7% upside from here.
Meanwhile, chart number three below shows the loonie – which now sits at 0.77 USD. The loonie recently reached my predicted 0.79-0.80 resistance point on this chart originally posted a year ago. The loonie had a strong run of it as commodities rose and the USD declined. Its not surprising to see a retracement beginning after such a parabolic move into overbought territory. In the loonies favor is a healthy chart for continuing strong oil prices – at least at this point of time.
My guess is that we will see a pullback into the 0.74 area for the loonie vs. USD. Seasonality begins to weaken for energy after May, and there is some short termed momentum starting to build on the USD vs. its world currency counterparts. In other words, we may see a bit of upside on our USD stocks on a currency adjusted basis (all other things being equal) in the coming weeks or months. Support at 0.74 will be positive for the loonie – but it will need to prove valid before calling it from this juncture.