From The Windows To The Walls, Till the ……..

Well, today was the day. Was it just a random Thursday? Sure. But, something very big happened today. Something that most people are not even aware of – and No, I am not talking about Taylor Swift performing in Toronto.

Today was a big day for Canada. Today was the day that the Canadian dollar broke a key support level. Instead of windows and walls, we are going to cover floors and ceilings. Nothing really rhymes with ceilings and floors, so I couldn’t think of a better title of this blog.

I have often talked about support and resistance levels on many different asset classes. These are generally called floors and ceilings in trading circles. The floor is the support, and the ceiling is the resistance. A floor or support level is usually a trading level where a lot of technical traders will buy into an asset, and a ceiling is typically where we would see a lot of market participants sell a certain asset. The asset could be gold, it could be bonds, it could be jellyfish future contracts – the asset makes no difference.

Today the Canadian dollar broke through the floor support level of 71.44 cents US. This level had been a line in the sand. If the CAD had been able to hold that level and not go lower then we could be looking at a bounce off of that level higher. However, now that we have broken the 71.44 level on the CAD, lower is the future for the dollar. Once again today the CAD dropped vs. the USD on no news, and continued its freefall. The CAD started the day slightly down, but once it dropped below the 71.44 level, the selling piled on, and the dollar finished well below where it started the session. As soon as the support level was broken, the algo and computer driven trades kicked in, and continued the selling pressure. 71.44 has been a key, critical long held level in the exchange rate. The fact we have dipped below probably does not bode well for a lot of economic things over the coming months. Think of dropping below this level akin to a liberal winning a seat in a long held conservative riding. Something had to change for it to happen. 71.44 now becomes a ceiling that the dollar will have to try and break back through in order to reverse its decline. That will be easier said than done. While the CAD has lost almost 4 cents against the USD in the last month, I do not think the selling is over. The next floor for the CAD vs the USD is right around 69.02. That means we could see yest another 2 cents shaved off the value before we see how it plays out at the next floor.

Speaking of ceilings and floors, we are now seeing the reverse of the above scenario happen on the US 10 year bond yield. The reason I specifically call out the US 10 year is that it is closely watched and closely linked to the Canadian 5 year bond yield. Today was a big day for the US 10 year, and it held its floor of 4.45%, and bounced up. The next ceiling for the US 10 year is right around 4.70% which looks like it is an easy pathway now that the 4.45% has held. Much like you will see something drop after it crashed through the floor, you can also expect something to zoom higher if it has held the floor. Look for higher US 10 year rates which could easily climb up to the 4.65% to 4.70% range without much work. This will have some knock on effects for the Canadian 5 year. Probably not bp for bp, but I can easily see a scenario whereby the Canadian 5 year goes up a basis point for every 2 bps of US 10 year. So, Canada 5 years could easily add another 10 to 13 bps of yield at this stage.

Perhaps there is some data that comes out that will reverse this trend. Maybe there will be a bunch of good news that hikes the Canadian dollar, or some really bad news that drives yields down. It is possible, but with support and resistance metrics clearly in place, it makes it that much tougher to dig out and rally above or below these lines.

And finally, I get asked constantly what people should look at for currency exchange. I follow quite a few different FX rates, but I think the most important to follow are:

USD / CAD for obvious reasons.

USD/JPY So much is transacted in Yen and USD that seeing trends here will tell a person when volatility is about to pick up. Generally, when shit gets bad, bond yields drop.

And finally the DXY. This is generally called the US dollar index. It is a measure of the strength or weakness of the US dollar vs. a basket of global currencies. The reason it is important is that it will tell you if the US dollar is really strong, or other things like the CAD is just weak. Likewise, if the DXY starts dropping, it will tell you if the Canadian dollar just got better, or if the US dropped. This can be super helpful when determining what the Canadian economy is doing – or better yet, what it is expected to do. Right now is a great time to be using the DXY. The DXY has been ripping lately. That is a good part of why the CAD is not buying as many US dollars. While the CAD is weakening on its own, the US dollar is on fire. Put the 2 together and you get a bad outlook for Canadian hoping to vacation outside of Canada this year.