Published: Tue, 14 Apr 2009 23:11:35 +0200

Canadian Dollar Rallies to 10-Week High

(CEP News) - Traders brushed aside falling commodity prices on Tuesday as the Canadian dollar climbed to its highest level since late January.

The Canadian dollar was the second best performing major currency. Of the G10 currencies, only the Japanese yen made gains against the loonie. Most recently, the U.S. dollar was down 0.0087 to 1.2113 against the CAD.

USD/CAD was relatively flat during Asian and European trading. The pair began to rise prior to the North American equity open and eventually fell as low as 1.2063.

Normally, the Canadian dollar's performance is closely tied to commodities and equities, but Tuesday was an exception. It rose despite more than 1% declines in stocks, oil and gold.

Negative market sentiment is having little impact on USD/CAD as it has been, and remains, on a strong downward trend since April 1. Shaun Osborne, chief currency strategist at TD Securities, said that although stocks fell on Tuesday, markets continue to stabilize. The VIX, or volatility index, declined 0.1 points to 37.2 on Tuesday.

"Volatility tends to be declining, the broader risk measures are improving," he said.

Osborne said the U.S. dollar could rebound to 1.22, but that rallies will likely be capped at 1.24.

"Technically, it looks like it wants to go lower," he said.

Osborne said he believes the pair will remain in the 1.18-1.30 range, where it has traded since November.

"I anticipate a bit more Canadian dollar strength but we're probably not going to break out of the recent range," he said.

The move lower in USD/CAD appears to be a technical move more than a shift in the fundamental outlook, according to Tyson Wright, senior FX trader at Custom House.

"The break below 1.22 was a strong buy signal for the Canadian dollar," he said. Wright also expects further gains in the Canadian dollar, but would be looking to buy USD/CAD around the 1.20 level. "I think there is strong support at 1.17 or 1.18 but I don't think we will get down there just yet."

Disappointing U.S. data is also not having much impact on the cross. Weaker-than-expected retail sales caused the U.S. dollar to strengthen against most commodity currencies, but the loonie was an exception. Following the data, the cross hit session lows at 1.2111 CAD.

George Davis, chief technical analyst at RBC Capital Markets, said the gains in the Canadian dollar appear to be follow-through from Monday's price action. He pointed out that USD/CAD broke through major support at 1.2268 CAD, which is a bullish indicator for the loonie.

"I think a lot of people were off yesterday and they came back today and saw the broad gains in the Canadian dollar and jumped on the trend," he said. "I think there is a risk that the Canadian dollar moves higher in the next few days."

Sacha Tihanyi, currency strategist at Scotia Capital, said he is expecting more Canadian dollar strength in the short term. However, he said it is still too early to determine if the cross is trading in a new channel. There is still a strong possibility that USD/CAD trades back up near the 1.23/1.24 CAD level, he said.

"I think we are seeing a limit in further U.S. dollar gains. I think we are going to see Canadian dollar bulls come in around 1.24," he said.

All data taken at 4:08 p.m. EDT.

By Adam Button, abutton@economicnews.ca, edited by Sarah Sussman, ssussman@economicnews.ca