Canadian dollar continues to trend lower, slipping to a 5-1/2-year low

A lower Canadian dollar makes our exports more competitive but it increases the cost of imports

Canadian dollar monthly nearby: Chart as of Dec. 12, 2014.

The Canadian dollar has been trending lower for the past three years. As recently as December 2012, it was trading at par to the U.S. dollar. Last year at this time it was worth 94 cents to the U.S. dollar and this year it is down to 86 cents.

Canada is a resource-based country and as a result the Canadian dollar is negatively impacted by the declining value of commodities such as energies and metals. Over the past two years gold has lost much of its lustre having lost a third of its value, and in the past six months crude oil prices have plunged 50 per cent.

A lower Canadian dollar makes our country’s exports such as soybeans and livestock more competitive in the global marketplace, but it also makes it more expensive to import international goods such as soybean meal and corn.

Being aware of the major trend of the Canadian dollar can add profitability to your farm’s bottom line. If you have a livestock operation and are purchasing soybean meal from the United States, you would benefit by converting Canadian currency to U.S. funds each time the loonie rallies into resistance.

If you are delivering soybeans into the United States and being paid in U.S. funds, you would gain by converting to Canadian currency when the Canadian dollar is lower.

Chart analysis can be used to determine the price trend and where resistance to the trend may be anticipated. During the course of a trend and all the fluctuations which compose it, there is a well-observed characteristic for prices to follow a sloping straight-line path. During a period of falling prices, this path is determined by a line drawn across the highs of the reactions. This line of resistance is identified as point A in the accompanying chart.

When an emerging trend can be identified and followed to its conclusion, it translates into opportunity. The use of trendlines is a valuable tool for accomplishing this.

Trendlines and channels

In a falling market, for a trendline to be both valid and reliable there should be at least three points of price contact, each of which coincides with the high of a market reaction that must peak at progressively lower levels. Once a trend begins in earnest, it has a high tendency to persist, so a properly constructed trendline (A), may be touched more than three times by the fluctuating market during the course of a big move without being penetrated.

After a trend is established and a trendline constructed, a line may be drawn that is parallel to the trendline depicting the channel within which prices will fluctuate as the trend proceeds.

In a downtrend, the channel’s upper boundary (A) is the downtrend line and it is constructed first. The lower boundary (B) is the return line and is drawn parallel across the lows of each progressively lower decline.

Market psychology

Sell orders materialize as a new downtrend begins to emerge, but many are at a limit price above the market. In the normal ebb and flow of the market some of this selling is satisfied on price advances. However, a portion of the demand is not satisfied and when prices begin to move down, some of these sellers jump in for fear of missing the move, pushing prices lower.

In a downtrend, the market declines and then bounces when the shorts take profit, only to uncover additional selling. Once this process is set in motion, it develops a momentum which strengthens the trend and makes it persist.

Until this market begins in earnest to trade above the upper boundary (A) of the downtrending channel, the downtrend in the Canadian dollar persists.

Send your questions or comments about this article and chart to [email protected].

About the author

Columnist

David Drozd is president and senior market analyst for Winnipeg-based Ag-Chieve Corporation. The opinions expressed are those of the writer and are solely intended to assist readers with a better understanding of technical analysis. Visit Ag-Chieve online at www.ag-chieve.ca for information about our grain-marketing advisory service and to see our latest grain market analysis.

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