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Loonie to decline as wildfire disrupts crude production

canadian dollarFor the most part of fiscal 2016 first quarter, the Canadian dollar remained one of the strongest currencies. The Loonie had a bull run against most of the major currencies, including the Swiss Franc. However, during mid-April, the CADCHF pair started sliding after hitting the first major block at 0.7737. There are valid reasons to believe that the decline is far from complete.

The Canadian dollar strengthened between February and April mainly because of a series of positive economic data. The exports recorded a 1% sequential increase to $46 billion in January. Furthermore, Statistics Canada revealed that more than 40,600 jobs were created in March.

The recovery in the price of crude oil to $45 per barrel also assisted in the strengthening of the Loonie. Generally speaking, the Canadian dollar, being a commodity currency, does well when the economic data is positive. An increase in the risk appetite of the investors would strengthen the currency. However, when the economy starts flattering or during turbulent times, the investors start purchasing safe haven assets, which includes the Swiss Franc.

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For the global economy to retain its original shape, the crude should further rise in price. Furthermore, Chinese imports should increase considerably. The amount of price rise seen in crude is not sufficient enough to claim a recovery. On the other hand, the strength of the Canadian dollar is now affecting the exports.

The March trade data revealed that the deficit has widened to a record $3.41 billion as exports to US dipped for the second consecutive month. The negative economic data triggered the slide in the CADCHF currency pair. As if this was not enough, the wildfire in western Canada is now affecting the crude oil production in the oil sands region.

More than 90,000 people in the oil sands region have been shifted to a safe location so far. The wildfire now threatens to double in size. Almost a quarter of the oil production from that region has gone offline. The region boasts to have the third largest oil reserves in the world, next only to Saudi Arabia and Venezuela. The current situation is expected to cause a further decline in the exports. Thus, fundamentally, it may take a while before the downtrend in the CADCHF ends.

Technically, the stochastic indicator is pointing downwards and is about to break below the crucial reading of 50. This indicates that the CADCHF currency pair will decline further to test the next support at 0.7250.

CAD/CHF Pair: May 9th 2016

CAD/CHF Pair: May 9th 2016

So, a canadian forex trader should go short near 0.7600 levels and place a stop loss order above 0.7850. The position should be winded when the price declines to 0.7250.

Purchasing a one touch put option contract would be a better solution for a binary options trader. The trader should choose a target price close to 0.7450. As far as expiry period is concerned, a two to three week time span would more be more than sufficient.


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