Forex traders, keep an eye on the Canadian dollar. The Canadian dollar index is in a triangle pattern, a breakout of which could create a big price move in CAD-related pairs.
The Canadian dollar is referred to as a commodity currency because its price direction is influenced by the price of crude oil. Canada is a major oil exporter. Oil has also been in a triangle, and is right near the top of the pattern. If oil continues to push higher, that could positively impact the CAD.
The Canadian Dollar Index
The Canadian dollar index shows how the Canadian dollar is performing against a basket of other major currencies. Looking at an index can provide a snapshot of how a currency is doing, instead of having to look through multiple CAD-related pairs/charts.
When a currency index is strong is weak, that currency will tend to be strong or weak (as the case may be) against most currencies. There may be exceptions, but the index is a good barometer of the overall direction you should be trading in with regards to that currency.
Right now the CAD is moving in a triangle pattern, so it is not trending and it could move either direction. A quick look at various forex pairs that include the CAD reveals a lot of choppy price action lately. Not in all pairs, but in most, as indicated by the index.
Forex traders can watch for a breakout of the triangle to signal more trending moves in CAD-related pairs.
Canadian Dollar Breakout
A triangle breakout in the Canadian dollar could occur to the upside or downside, although the index is closer to an upside breakout currently.
The triangle height is 3, or the difference between 77 and 74 which are the approximate high and low of the triangle. The height can be added or subtracted to/from the triangle breakout level to give an estimated price target.
The upside breakout level is currently 76.50, providing a price target of 79.50.
A downside breakout occurs near 75.20, providing a downside target of 72.20.
Both breakout levels will change over time since the trendlines they are based on are sloping.
The triangle is right on top of a support zone, which has been tested multiple times. This improves the odds of an eventual upside breakout. A downside breakout, if it were to occur, would begin hitting support near 74, extending all the way down to 72.50. Longer-term traders may view this as an opportunity to buy the Canadian dollar near its lowest levels this decade (the CAD briefly dipped below 72 as oil hit major lows in early 2016).
Trading the Canadian Dollar Breakout
The index is a gauge of how the Canadian dollar is doing. A breakout in the index isn’t tradable in and of itself, but it can signal that the CAD is getting strong (in the event of an upside breakout) against other currencies. A trader could then buy the CAD versus other currencies.
For example, the USD/CAD pair has been pushing lower overall in 2019. If the Canadian dollar index breaks higher, look for the USDCAD to break lower (USD gets weaker and CAD gets stronger).
The same concept would apply to the EURCAD which has been in a tight channel for the last few months.
The AUDCAD has a similar chart the EURCAD.
GBPCAD and NZDCAD have both been rallying recently, so the CAD is weaker against these currencies lately. I would avoid buying the CAD against those currencies since their respective indexes also showing more strength recently. In other words, if the CAD index is strong, focus on buying the CAD against other currencies that are showing weakness.
Comparing CAD to Other Commodity Currencies
The Canadian dollar is interesting to me because it is performing better than the other major commodity currencies (there are multiple commodity currencies). The Canadian dollar index has outperformed the Australian dollar index (AXY) as well as the New Zealand dollar index (ZXY) over the last 1, 2, and 3 years. Given its strength relative to the others, it makes more sense buying the Canadian dollar if it breaks higher than buying these other commodity-related currencies.
Final Word on Currency Indexes and the Canadian Dollar
Forex trading is always an assessment of which currencies to trade against which currencies. Indexes can help cut through the clutter and see which currencies are stronger and weaker. It is best to buy strong currencies against weak currencies, and short weak currencies against strong currencies. What is strong and weak is always shifting, but these trends can last for a long time, putting the edge in our favor for months or even years.
Keep an eye on the Canadian dollar. If it breaks out, it will start to perform better against other currencies. Look to buy the CAD against other pairs that have been showing weakness.
By Cory Mitchell, CMT, join me on Twitter @corymitc.
Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, or even more than you deposited if using leverage.