The US dollar (USD) rises when stocks fall more often than not. If you believe, as The MoneyLetter columnist Keith Richards does, that there is reason for a substantial market correction this year, this would add fuel to a rising USD. Mr. Richards says he will be converting more financial assets into USD if/as/when we see the loonie reach $0.80.
Loons fly north from their southern retreats as Spring approaches. So too do Canadian retirees known as ‘snowbirds’. The Canadian dollar (CAD), affectionately known as the ‘loonie’, follows that same desire to fly north as the weather begins to warm. Our friend Jon Vialoux over at www.equityclock.com publishes a seasonal chart for the CAD that shows the single best time to be long the loonie is from its seasonal low point in February into its seasonal high point in mid-June. But the chart also shows that the biggest upside has occurred by the end of April.
It most certainly does appear that the loonie is following its traditional, seasonal, northern flight this year. Having bottomed at just over $0.76 in March, it is currently trading around $0.78USD. The loonie frequently likes to trade in a range between $0.78 – $0.83. I suggested back in early March on my blog at www.valuetrend.ca that there might be a reasonable chance for the CAD to move back into that trading range by the Spring—despite the bigger problems we face as a country of current rising debt, increased taxation and an unfavorable business environment under current left wing governments.
Other CAD tracking charts show that another near-term downtrend began in the second half of last year. We are currently approaching the top of that downtrend, suggesting a target of about $0.80 before we challenge the top of this trend channel. As I noted in my blog in March, my target was $0.80. We’re now a penny or so away from this target, which resides along the top of the minor-trend channel. Before we get too excited, there is some compelling evidence suggesting that the current rally in the loonie may be short-lived.
The USD depressed by overly bearish sentiment
As you may know, the USD—against a basket of world currencies—has been trending down over the past year or so. In fact, www.sentimentrader.com posts a ‘USD Optix’, which is a compilation of sentiment indicators pertaining to the USD. The Optix suggests that the USD has overly bearish sentiment. And that, as you may know, is a contrarian ‘buy’ signal. Too much pessimism on any asset class tends to reverse itself after reaching an extreme. And that reversal in sentiment typically results in money flow into the currently depressed asset. Should the USD begin to move up when sentiment reverses, the movement will add pressure to an already vulnerable position for the Canadian loonie.
Further to that potential, the USD has a negative correlation with the stock market. The USD rises when stocks fall more often than not. I discussed this on a blog at my website noted above. If you believe, as I do, that there is reason for a substantial market correction this year, this would add fuel to a rising USD.
As I have noted in the past, I will be converting more financial assets into USD as/if/when we see the loonie reach $0.80—or thereabouts. That time is approaching as I write this article.
As discussed above, chart patterns on the CAD, along with sentiment data and a stronger outlook for the USD, suggest that the loonie will finish its northern flight sooner rather than later. You might consider holding some USD exposure in your own portfolio should that trade come to fruition. If nothing else, it might be a bit of a hedge against a stock market decline.
Keith Richards, Portfolio Manager, can be contacted at firstname.lastname@example.org. He may hold positions in the securities mentioned. Worldsource Securities Inc., sponsoring investment dealer of Keith Richards and member of the Canadian Investor Protection Fund and of the Investment Industry Regulatory Organization of Canada. The information provided is general in nature and does not represent investment advice. It is subject to change without notice and is based on the perspectives and opinions of the writer only and not necessarily those of Worldsource Securities Inc. It may also contain projections or other “forward-looking statements.” There is significant risk that forward looking statements will not prove to be accurate and actual results, performance, or achievements could differ materially from any future results, performance, or achievements that may be expressed or implied by such forward-looking statements and you will not unduly rely on such forward-looking statements. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please consult an appropriate professional regarding your particular circumstances.
This is an edited version of an article that was originally published for subscribers in the April 2018/Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.
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