CANADA S&P/TSX COMP INDEX & USD/CAD

Here is a valuable analysis that would mainly interest Canadian investors and traders. Throughout the 3 years I’ve spent in Canada I’ve realized how important the crossrate has been for the Canadian economy and its export/import business. Currency advantage (when I started my studies in 2004, 1 U.S. dollar equaled 1.4 Canadian dollar), better education and multicultural society were some of the reasons why I chose Canada to study for my Masters degree in Economics. Though the latter two are still very much in place (good education & multicultural society), thanks to its commodity based economy and relatively better banking system + more stable real estate market, the currency advantage  has disappeared with the Canadian dollar gaining strength.

Strong CAD helped importers of goods and services for the past decade. This relationship might be changing. Traders and businesses should watch out for a possible depreciation in Canadian dollar if the above analysis were to be confirmed. USD/CAD might be forming an inverted H&S chart pattern (base formation, bullish for USD) and a breakout above 1.065 can result in further depreciation of the Canadian dollar. It is interesting to see a symmetrical triangle forming as the right shoulder of the 2 year-long inverted H&S pattern. What’s more interesting is that the same symmetrical triangle has also formed on the S&P/TSX Composite equities index.

Conclusion: Charts are showing bullish signs for the USD and bearish signs for the equities. However we should wait for strong confirmations. Breakout from the symmetrical triangle consolidation ranges will confirm the next directional movement on both asset classes. Strong support/resistances for the equities and currencies are the 200 day moving averages (12,450 for S&P/TSX Composite Index and 1.00 for USD/CAD). As long as S&P/TSX Composite stays below 12,450 and USD/CAD above 1.00 we will expect strong U.S. dollar and weak equities.