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

by on April 12, 2011 | ETFs Mentioned:

Wall Street started the week on a positive note with investors feeling optimistic about upcoming earnings results. Merger and acquisition activity also helped push the market higher, with internet operator Level 3 Communications buying Global Crossing for approximately $3 billion. Japan was unfortunately hit by yet another earthquake on Monday, while the total death count from last month’s tragedy surpassed 13,000 while more than 14,000 still remain missing. Crude oil futures slipped lower towards $110 a barrel, while gold struggled to make much headway and traded around the $1,470 an ounce mark. The dollar has small gains versus the euro, however, the greenback shed some points against the yen in the currency markets.

This week looks to be stacked with economic reports from around the globe in addition to domestic equities kicking off first quarter earnings seasons [see Three ETFs To Watch This Week: XLF, SIL, INP]. Wall Street will be paying close attention to U.S. retail sales for March due out Wednesday, while on Friday consumer price index will be the main focus.

Rydex CurrencyShares Canadian Dollar Trust (FXC)

The Bank of Canada is scheduled to give their decision regarding interest rates on Tuesday morning at 7am (ET). Investors looking to gain exposure to the Canadian dollar or use the upcoming news as an entry point for a long/short position ought to consider FXC. This ETF is designed to track the price of the Canadian dollar relative to the U.S. dollar [see FXC Fact Sheet].

Canada’s overnight rate has been at 1.00% since September 8th of 2010 and analysts are expecting for the BoC to hold rates constant this time around as well. The Canadian market has recovered nicely since the lows of the recent financial meltdown, and rising commodity prices have further stimulated the natural-resource heavy economy of our Northern neighbors. While growth has been encouraging, the BoC has many other factors to consider before making the move to hike rates.

Despite strength in the Canadian economy, global uncertainties such as the ongoing debt crisis in Europe and tensions in the Middle East are inevitably dragging down the pace of the economic recovery as a whole. The Bank of Canada is also heavily influenced by the U.S. Fed, and thus more and more positive news out of America will slowly but surely start to put pressure on policy makers to adjust rates and keep inflation from spiraling out of control [see Use Caution With Currency ETFs]. Some analysts are expecting a rate hike in July, and while many factors do support that hypothesis, its important to consider that Canada’s financial market typically slows down a little in the summer months. Likewise, a rate hike during a time of subdued economic activity might prove detrimental to the economic recovery as a whole, and thus policy makers might wait until after the summer to tighten monetary policy.

Technical Analysis

Click to Enlarge

FXC has been charging relentlessly higher since its low in March of 2009 when the fund bottomed out at $76.59 a share. Since then, the fund hasn’t undergone any significant corrections, and it’s biggest setback has been range-bound trading during the first half of 2010. Consider the daily chart to the right. Since FXC broke out past the $100 mark in January 2011, the fund has been rising nicely, even undergoing a brief correction in the middle of March and bouncing off new support at the $100 level (previously resistance). The fund is currently trading just above $104 a share, and any bullish commentary from the BoC on Tuesday morning (even if rates are held constant) will surely help propel the ETF towards, and perhaps past, the $105 level [see more on FXC's technicals page].

Likewise, if the Bank of Canada is less hawkish than expected in their outlook going forward, then FXC may quickly retrace down to $102.50 a share. If the fund proceeds to close below $102 a share in the days following, then investors can expect further downside as FXC will likely test support near the $100 level [see Understanding ETF Technical Analysis]. From a longer-term perspective this fund is in an uptrend given that it’s 200 (yellow) and 50 (blue) day simple moving averages are both sloping upwards.

For investors bullish on the Canadian dollar going forward, any significant corrections ought to be used as a buying opportunity. However, its important to patiently observe FXC as it settles above established support before jumping in, as opposed to taking on excessive risk and trying to call the bottom (or top). A close below $100 a share would call for a re-assessment of the current uptrend. 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.