Tuesday’s ETF Chart To Watch: CurrencyShares Canadian Dollar Trust (FXC)

by on March 1, 2011 | ETFs Mentioned:

U.S. equities started the week on a positive note as domestic indexes rose modestly after news of better-than-expected personal income data left investors optimistic heading into March. News of corporate deal-making also helped push the markets higher, however, pending home sales were down for a second straight month, but investors didn’t seem too concerned about the continuously discerning housing statistics. UBS downgraded Amazon from buy to neutral, which sent shares of the online-retail giant tumbling lower. The investment bank cited Amazon’s recent plans to offer free streaming movies to its “Prime” service subscribers as possibly hurting the company’s operating profit margins, and it will likely require further investments into movie rights as well. Meanwhile in the commodity world, gold inched higher during trading hours and managed to stay above the $1,410 an ounce mark but oil on the other hand slipped lower to just below $97 a barrel as tensions cooled in some regions of the Middle East.

Investors have a stacked week ahead of them in terms of economic data including Eurozone consumer prices, Australia GDP, and a round of central banks releasing interest rate decisions. On the home front, investors will be keeping a close watch on the U.S. unemployment rate for February when it hits the street on Friday.

Later today, at 9:00am (ET) the Bank of Canada will issue its decision regarding the benchmark overnight interest rate, which is expected to remain unchanged at 1%. The BoC will issue a statement along with its actual interest rate decision, which is often times far more insightful in fundamental terms since it offers commentary on the ongoing recovery process as well as an outlook into the near future. Within its statement, the BoC will also usually offer hints about future monetary policy changes, which further allow investors to develop their own personal outlook on the nation’s economy going forward. Likewise, any hints of possible rate changes in the future are sure to hold more weight in terms of noteworthiness, as opposed to the decision regarding current rates [also see Canada ETFs Rise On Interest Rate Hike].

The Rydex CurrencyShares Canadian Dollar Trust (FXC) allows investors to gain exposure to the ‘loonie’ and could be a volatile fund in today’s session depending on the outlook and policy announcements from the Canadian central bank. Furthermore, FXC is very liquid and the fund is also optionable, which greatly expands the variety of trading strategies available to investors.

Looking at the chart above, we can see that following the first rate hike decision (prior rate was 0.25%) on June 1, 2010, that FXC has been in a fairly modest uptrend. Following the rate increase decision on September 8, we can see that the Canadian dollar entered into a much more aggressive climb upwards. Since then, the BoC has been keeping rates steady at 1% and the Canadian dollar has been fairly strong given the country’s slow but sustainable recovery [see all the ETFs that offer exposure to Canada].

A key statistic that is sure to influence the bank’s decision today is the nations most recent GDP number. At the start of this week Canada posted a very robust GDP growth, reporting growth of 3.3% for the fourth quarter.  It’s previous quarter saw growth of 1.8%, and expectations for this quarter were set at 2.9%. Following the better-than-expected GDP report, the Canadian dollar was quick to appreciate in the currency markets, most notably versus the Japanese yen.

While it is likely for FXC to continue its slow and steady uptrend, traders and investors alike are advised to wait until after the decision and statements have been made before establishing either long or short positions in the ETF. The BoC may surprise investors by either raising rates, which can be viewed as a potential drawback to the recovery, or by keeping rates the same, which would truly upset those betting on further appreciation of the Canadian dollar [Warning: Use Caution When Investing In Currency ETFs of Commodity Dependent Nations].

As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit taking techniques.

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Disclosure: No positions at time of writing, photo is courtesy of Pedro Szekely.