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Lou Schizas

What the charts reveal about the loonie's next move Add to ...

The future value of the Canadian dollar is a topic that is of concern to all participants in the economy - whether they realize it or not. A few years ago a co-worker asked how it was possible that his U.S. dollar investments had gone up and yet his returns were less than he imagined they would be. After a quick look at the situation, it was clear that both he and his adviser had failed to take into account that the loonie had made a major advance against the greenback, and as it turned out, would continue to do so for some time.

This past summer I was contacted by the owner of Simi Accessories Corp., Jim Boutsikakis. Jim imports goods from China and he wanted to improve his purchases of the U.S. dollar. His incentive is that every cent that he buys on a favourable basis goes right to his bottom line. I spent a couple of hours with Jim to at least give him a fighting chance in the battle to purchase the U.S. dollar at a reasonable level.

In many cases I would say that most people get caught offside when it comes to foreign exchange because they don’t know what tools to use. As a result, they leave the outcome to the market when they buy the currency that they need, which can cut both ways. In an effort to help all of the readers of globeinvestor.com, let’s examine some simple charts that will prove useful.

The three-year chart for the Canadian Dollar Index is one of the tools you should use if you are going to have exposure to foreign exchange risk. It helps identify trend, support and resistance for the loonie. The chart tells the tale of a currency that has been rangebound for most of the last 18 months. At the bottom end of the range there is support at 94 and at the top end of the range there is resistance at 100.

Every effort to break above and stay above 100 has failed. What that tells us is that if we are going to see a break to 115, as some have suggested, then we will have to see some solid evidence that the loonie can break above 100 and stay above it with conviction.

The six-month chart for the Canadian Dollar Index illustrates the support at 94 and also depicts the resistance at 100. The MACD proved an effective indicator of shifts in buying and selling momentum. The turn above the signal line in September of 2010 informed the knowledgeable investor that the loonie was making a move higher. The advance produced a six-point gain from 94 to 100 by mid-October. It also signaled the shift in momentum once the loonie hit resistance at 100 and the subsequent retreat to 97.

The MACD then signaled a reversal of the selling, taking the Canadian dollar back to 100 in November and then another reversal taking it back down to 98. At this point, there is no signal that there is another reversal developing so expect continued pressure to the downside and a test of 97.50 where there is support.

The volatility in the foreign exchange space is a trader's dream. There is a lot of action on both sides of the market and it's highly liquid. For the average investor or business owner it can be like a ride on Cyclone at Coney Island: exciting at times, stomach churning at others.

Finally, for those investors who want a window on the direction of the U.S. dollar, let’s examine the three-year chart for the U.S. Dollar Index. The MACD signalled the reversal at the top in May of 2010 that led to the selling that took us all the way down to 76 in November. But it caught a bounce off of support and has started a rather steep ascent.

Better management of foreign exchange risk will help investors and business operators improve their returns, which - when all is said and done - is why we spend so much time chasing a buck.

Happy Capitalism!

Follow on Twitter: @louschizas

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