USD/CAD: Parity in the Making?

By: Andrei Tratseuski

A rapid turnaround in the Canadian economy can be clearly seen by reflected in the price of Loonie. On countless occasions, economists and traders predict that parity is in the making between Canada and its bigger neighbor to the south. Manifestation of the following has reasonable backing. Canada is currently on the track of tightening cycle, the emerging stage. The economy is performing relatively well compared to other nations. The only room for a concern was a sharp drop in the Retail Sales the previous month. Aside from couple of flukes, the economy is preforming relatively well. The manufacturing sector and rising commodity prices are the catalysis for an unparalleled performance. The economy continues to create slow but steady steam of employment, meanwhile Exports are continuing to drive the economy to the upside. Overall, things are getting relatively better as time progresses.

All things aside, the markets are predicting that the Bank of Canada will increase their interest rates in the upcoming meeting. Currently the rates stand at 50 basis points expecting to be raised by additional 25 bps. The overwhelming demand out of China for raw materials, along with timid growth in the US should provide a relatively solid growth potential for the Canadian economy. However, the biggest driver for the Loonie (Canadian Dollar) will be increasing amount of funds flowing to the country due to the exports. The following will likely to give Canadian Dollar legs to reach parity with the United States Dollar during the year. Return of risk appetite in the markets adds to a rise in the Loonie.

Looking at the technical side we expect a short time move to 1.0410. We use our strategy of ABCD lines and Fibonacci extensions along with retracements. AB line is equivalent of CD line. The Fibonacci extension of 161.8% of BC line falls at the same placement as CD line, confirming our point of profit taking. To add the icing on the cake we notice a Fibonacci retracement of 76.4% at the same level of line XA. All of the levels fall around the same area of 1.0410, giving our target.