Will Canadian Dollar Stage A Rebound ?

Fundamentals

Sometimes the actions of traders in the financial markets don't seem to make sense. A case in point is the sell-off in the value of the Canadian Dollar(C$) vs. its larger neighbor to the south. The pundits blame the fall of the Loonie on a "risk off" or a "flight to safety" mentality by traders and investors due to the continued economic concerns regarding Europe and a slowdown in economic growth in China. Many traders seem to still consider the Canadian Dollar as a "commodity currency" despite its sound banking system, free market economy, higher interest rates, and solid employment picture. Ironically, some of the funds being moved out of the C$ have gone into the Japanese Yen, despite that country's aging demographics, enormous government debt, and recovery from a devastating earthquake/tsunami. Yet this is considered a "safe" asset by market participants. The "risk off" trade has sent front-month C$ futures plunging from nearly 1.0200 vs. the Dollar to 0.9550 in one month's time. Some analysts believe that the commodity bull market has ended and a new downward cycle is about to begin. This has also weighed on the C$, especially as Oil prices have fallen nearly $30 off their recent highs. However, should this call be premature, the Canadian Dollar may be poised for a significant up-move once traders realize that commodity demand has not cratered, and assets move back into "risk-on " trades.

Technical Notes

Looking at the daily continuation chart for the Canadian Dollar futures, we notice prices consolidating after the Loonie fell over 600 pips during the past month. Prices are now hovering near the 20-day moving average (MA), but need to rally nearly 200 pips to test the 200-day MA. The 14-day RSI has rebounded from oversold level, currently reading a more neutral 46.64. The June 4th low of 0.9568 looks to be solid support for the lead month futures, with resistance seen at the 200-day MA, currently near the 0.9899 area.