07-18-2014: September Canadian Dollar: First Rate Hike in Seven Years

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Point & Figure

Internal Progrm
Third System

Historic Range

Random Chart
Calend Spread

Level Table
Other Factors





It's all about interest rates and the first time the Bank of Canada has raised their prime rate in seven years. Will this be enough to sustain currnet improved exchange levels against the U.S. Dollar? Many think so. At this point the Bank of Canada seems less reluctant to raise rates further than the U.S. Federal Reserve. We usually attemt to provide loss-limiting option trade recommendations, but for the Canadian Dollar it has become difficult due to stale exchange quotes, a change in exchange option data format and multiple expiration date offerings within a single month. People don't see to like to trade currency options very far out, unlike other commodities, even though the underlyiing futures are much more limited in expiration dates.

Intermarket Analysis

We fed Kansas wheat, Chicago wheat, and soybeans into a neural network to get the following result:

Parabolic Chart

September Canadian Dollar:

Parabolic Chart

Nirvana Chart

September Canadian Dollar:

Initial Chart

News Analysis

A recent surprise rate-hike from the Bank of Canada is responsible for recent strong rise in the Canadian Dollar exchange rate. It was the first time the Bank of Canada raised interest rates in seven years. There is also fresh speculation about another possible rate hike in Canada in October. The current overnight rate is 0.75%. There appears to be ongoing fundamental support for that. A two-year consolidation zone lies at about 80.00 (versus 100.00 U.S. Dollar). The chart suggests an decidedly short-term overbought condition in the Canadian Dollar by speculators. In the U.S., there has been delay in healthcare reform and other legislation to help a sagging manufacturing sector. Soft European inflation numbers are supportive for the Dollar.

The Canadian interest rate move had been widely expected. Bank officials had been signalling over the past few weeks that they thought the Canadian economy was performing well. A $2 rally in oil prices over the past week also helped. Gold prices also gained. Inflation in Canada is however currently below the bank's stated target of 2%. The bank believes that softness is only temporary. "By saying it will look past this current softness, the BAnk of leaving an October rate hike on the table," said CIBC economist Royce Mendes. With the U.S. Fed likelyi taking a more cautious approach near term, he said to look for the loonie to remain at these stronger exchange rates until late-2017. Economists at Toronto Dominion agreed that another rate hike is coming soon, most likely in October.

The Toronto Stock Exchange's major indices remain rather flat.

Canadain banks and lenders all stand to gain from the recent rate hikes. Borrowing activity could be dampened somewhat. Canada is the U.S.' largest trading partner. Companies like Potash Corporation or Cameco could see prices increases to offset lossin the value of the U.S. Dollar. Cameco needs to charge $22 instad of $20 for uranium to maintain its pricing power. Commodity prices and the U.S. Dollar are negatively-correlated, so when one goes up, the other goes down. This will impact energy stocks.

Canada weak CDollar policy strategy flopped, rather than being a salve for the wounded Canadian economy in 2015 and 2016, it mostly produced soaring housing prices. Crude oil appears to be set to cut short the Canadian Dollar's best rally of thke year. Warren Buffett's Home Capital investment group helped spur the rally in the Canadian Dollar, being heavily invested in oil. A Saudi=-Russian oil deal put a temporary floor under a weak Loonie, when it was decided to extend oil production curbs into 2018.

Investors had been focusing on slumping oil prices, trade issues with the U.S., and signs of concern in the Canadian housing market insteadof reflecting on any good data in Canada.

Pessimism also surrounds sluggish U.S. data causing doubt that the U.S. Fed will be able to stick to its planned one-more-rate-hike tightening this year. Poor manufacturing figures caused speculation the Fed will hold off on further hikes longer-than-expected. Inflation and retail sales data in the U.S. undershot forecasts in the U.S.

Some believe Trumponomics will send the Canadian Dollar resounding down to 0.70 in the coming year or so. There are some "autoregressive integrated moving average" predictions that support this.

Point & Figure Chart

 86.0I                                                                  T  7/17
     I IMM - Sep-17 Canadian Dollar, $100000, c/$  Cm.=0.03  Lim.= 0.8
     IXO                  X X
     IXO                X XOXO
     I O                XOXOXO
     I O              X XOXO O
     I O              XOXO   O
     I O              XOX    OX
     I O              X      OXO
     I O              X      OXO
     I OX X           X      OXO
     I OXOXOX     X X X      OXO
     I OXOXOXOXOX XOXOX        O                XO
     I OXOXOXOXOXOXOXOX        O                XO
     I OXO O OXOXOXOXO         O                XO
     I OX    OXO OXOX          O                XO    X X                     X
     I O     O                 O              X XOX   XOXO    X               X
     I                         O      X     X XOXOXO  XOXOX   XOX             X
     I                         OX     XO    XOXOXOXO  XOXOXOX XOXO            X
     I                         OXO    XO  X XOXO O OX XOXOXOXOXOXO            X
     I                         O OXOX XO  XOXOX    OXOX  O OXOXOXOX X   X XO  X
     I                           OXOXOXO  XOXOX    O O     O OXO OXOXOX XOXO  X
     I                           O OXOXO  XOXO               OX  OXOXOXOXOXO  X
     I                             OXOXO  XO                 O   O OXOXOXOXO  X
     I                             O OXO  X                          OXOXO OXOX
     I                               OXO  X                          OXOX  OXOX
     I                               O O  X                          OXOX  OXOX
     I                                 O  X                          OXOX  O OX
     I                                 O  X                                  OX
     I                                 O  X                                  OX
     I                                 OX X                                  OX
     I                                 OXOX                                  O
     I                                 OXOX
     I                                 OXO
     I                                 OX
     I                                 OX
     I                                 OX
     I                                 OX
     I                                 OX
     I                                 OX
     I                                 OX
     I                                 OX
     I                                 O
                                      11                            1111
The above chart is giving a conventional buy signal.

Cyclical and Seasonal Factors

We are headed toward a cyclical high and a weak seasonal up period.

Cyclicals Cyclicals Seasonals

Internal Program

Our best-performing internal program is "Pattern." It is giving a buy signal.

Internal Printout 1 Internal Printout 2

Results of "Pattern" for Canadian Dollar (blue lines = successful trades, red, unsuccessful): (Always in the market.)


Third System Confirmation

Our third system has triggered a sell signal. (Note, disregard the year on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)

Third System


The point value is $1,000. Initial margin on a single contract is $1,045. Use of options is not advised.

Historic Range

Scale trade buyers are entering the market for the long term in this price range.

Historical Chart

Commitment of Traders

Commitment 1

In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Blue is small speculators. Red is large speculators. Green is commercials. Large speculators with the best track record are getting increasingly-long.

Commitment 2

Interpretation of a Different Site Below (Their trader categories vary from ours):

Commitment 3

Volatility / Probable Range

FB 1 FB 2

The average volatility shown below suggests that an uptrend remains intact from the last volatility low point.

Range/Volatilitiy Chart

Possible Future Prices

Random Chart

Option Recommendation

We do not recommend that you trade Canadian Dollar or other IMM options at all. The exchange has revised option symbols to incorporate many more expiration choices, but this has not resulted in an increase in interest in these options that we can see, just a lot of confusion. Volume is very thin for that reason.

Still, if you must trade options,
Our option trade recomendation is to Buy (400) Canadian Dollar October 80 Calls @ 0.005 or less. At the time of this writing the "ask" provided by exchange is 0.00620.

Calendar Spread

What the Sep. - Mar. calendar spread suggests to us is that buying the near contract and selling the far one is at most times not profitable, which we think is a sign that these futures may go down in the long run. This disagrees with our ultimate conclusion. The best time to enter or leave the above spread is when it is at -0.08 or narrower buying the far as prices are rising and then selling the near, and exiting or entering when it is at -0.40 or wider selling the far as prices are falling and then buying the near. At this time, we appear to be at the buy the far, sell the near point.

Level Table:

Level Table

The path of least resistance is up.
 80.0|                                                                  T  7/17
 IMM - Sep-17 Canadian Dollar, $100000, c/$  Cm.=0.03  Lim.= 0.8
     |Z[   <<<
     |UUUUVVVVVW 73.0|UUVVVVVVVV_______________________________________________________________
 72.0|-A-B-C-D-E-F-G-H-J-K-L-M-N-O-P-Q-R-S-T-U-V-W-X-Y-Z----|----|-- TPO= 0.038
                   1 1 1 1 1 1                                        
       7 8 8 8 9 9 0 0 1 1 2 2 1 1 2 2 3 3 4 4 5 5 6 6 6 7           7
       1 0 1 2 1 2 1 2 0 2 0 2 0 2 0 2 0 2 0 1 0 1 0 1 2 1           1
       9 1 5 9 3 7 1 5 8 2 7 1 6 3 6 1 7 1 4 9 3 7 1 5 9 4           7

Other Factors

Multiple Chart Indicators Summary
Multiple Chart Indicators Summary

Here's an intraday chart for a previous day ( 7/14 ).

Intraday Chart

                 Risk Versus Opportunity Report

               CDU7    September Canadian Dollar

                      High Price:  81.22
                   Current Price:  78.88
                       Low Price:  77.72

                            Risk:  0.029
                     Opportunity:  0.059

                    (O/R) Ratio =  2.017

Overall Recommendation

Decision Weighting Factors
FactorsWeighted Points
Inter-Market Analysis + 1
Parabolic Chart + 1
Nirvana Chart - 1
News + 1
Point & Figure + 1
Cyclicals - 1
Seasonals - 1
Internal System 1 + 1
Internal System 2 0
Third System - 1
Historic Range + 1
Commitment of Traders + 1
Range/Volatility + 1
Level Table + 1
Other Factors + 1
Total + 6
Place 14 September Canadian Dollar on a Buy Watch with stoploss @ -1.08 below the get-in point when recent price is represented as "151.52".