Focus on the Loonie

While most Forex traders concentrate on the big 4 Major, which include theEUR/USD, USD/CHF, GBP/USD, and USD/JPY, the opportunities presented by other currency pairs should not be overlooked. An emerging example is the USD/CAD.

The "loonie" as it is called, is a classic case where a currency pair reflects theunderlying fundamentals of the economy of that currency. In particular, the recentincrease in prices in the crude oil and the general upward trend in commodity prices has contributed to a strengthening of the Canadian economy. In fact, the Canadian currency is known as a commodity currency, which means it is greatly correlated with commodity prices. This also means that a Forex trader needs to be aware of key commodity price action which are driving factors in determining the direction in MANY currency pairs. It is not an accident that the CRB index has had a strong year and year to date has made a new high 33 times! Commodities, as a sector, are on the rise and this helps the Canadian currency. The current fundamental situation is a classic example of how important fundamentals are to a currency direction. Let's take a closer look.

Recent economic data show that Canada is growing as a result of its role as an exporter of resources and, in fact, a net exporter of oil. Recent estimates on the tar sand oil reserve capabilities project an amount of recoverable oil greater than Saudi Arabia. As crude oil prices increase, the ability to tap these reserves in a cost-effective way will increase. It is logical therefore to see Canada as benefiting from this new era in oil prices. Canada's GDP is reflecting these fundamentals as well. The July Canadian GDP report provides a snapshot of the Canadian economy. The Canadian GDP advanced 0.2% in July following a 0.3% increase in June. The growth in the GDP was concentrated in mining, oil and gas. However, the manufacturing, wholesale trade, and utilities industries declined. It is significant that the key province of Alberta, has experienced labor shortages. In effect, Canada has two economies, a growing western economy based on resources and an older manufacturing and service oriented economy that has less potential for growth.

What does this mean for the Forex trader? The Forex trader, as a result of these fundamental conditions, will be able to see an increase in trading opportunities in the USD/CAD pair. Those traders wanting to play the strength of the Canadian economy should look for selling opportunities and signals. Realizing that prices don't just move in straight lines, there will be periods of retracement where the loonie suffers in value as sentiment for the dollar goes up, and when oil prices sell off.

The recent charts tell the story. We see the USD/CAD pair testing 13 year support, and then retracement, as short term sentiment changes. A technical analysis of the price patterns shows a significant downward channel in this pair. The retracements in this weekly chart correlate with key Fibonacci retracement levels.

This kind of pattern provides ample trading opportunity for buyers and sellers. Let's zoom down to the 4 hour chart.