Loonie Breaks Out
Ross Woodfield | Aug 28, 2014 02:41AM ET
Fear not, there is not a lunatic on the loose. A couple of things happened in Canada yesterday that saw a solid breakout for the Loonie (the nickname for the Canadian dollar) against the USD. These were not on any economic calendars, but could change the fortunes of the Canadian dollar.
Firstly, Burger King Worldwide Inc (NYSE:BKW) announced it would be buying Tim Hortons Inc. (NYSE:THI) Inc. for C$12.5b and become the world’s third largest fast food company in the process. Traders drove the USDCAD pair lower as they speculated the company will need to buy large sums of Canadian dollars to pay for the deal. Furthermore, Burger King said it would relocate its headquarters to Canada, which has a lower corporate tax rate.
The second piece of news to affect the Loonie was the announcement that business leaders in Ontario and BC would cooperate to create a Chinese Yuan trading hub. This will create the first yuan trading hub in North America. This will eliminate the need for Chinese and Canadian businesses to convert into US dollar, saving transaction costs and increasing demand for the CAD.
From here, further advances for the CAD will be held up by support at 1.0817, 1.07672 and 1.0708, with a long term bullish trend likely to act as heavy dynamic support. Such an impulsive movement is likely to suffer a pull back as traders take profits. We have already seen a pullback to the resistance at 1.0867 and a rejection off that level, with further resistance found at 1.0902 and 1.0939. This could be enough to satisfy the market that this breakout has further to go. I would be reluctant to take a position until either the support at 1.0817 or the resistance at 1.0867 breaks.
The MACD looks like it is still extending to the bearish side, however, the stochastic looks to be oversold and pulling back. Regardless of whichever line breaks, either support or resistance, we can set ourselves up to catch the momentum. If the Stoch moves out of oversold while still threatening the support, we could see a breakout to the downside.
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The Canadian Dollar has broken out of a bullish trend against the US Dollar on some news items that will boost demand for Canadian Dollars. This movement could have further to move and traders should keep an eye on the indicators and support/resistance levels for clues as to which way.
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