Central Bank Boosts This Canada ETF

10/26/2011 9:00 am EST

Focus: ETFS

This ETF that tracks the Canadian dollar is likely to move higher on the heels of the Bank of Canada’s rate decision and economic commentary. Here’s how traders of all skill levels and risk profiles can play it.

Good news from the Eurozone lifted investor’s spirits on Monday, as equity markets cheered on agreement talks aimed at restoring financial stability in the debt-burdened country bloc.

Earnings results from Caterpillar boosted domestic equity indexes higher after the construction giant reported a better-than-expected profit of $1.14 billion. Encouraging commentary from the company cited that low interest rates in the US and Europe will help drive GDP growth going forward.

Gold futures charged higher on Monday alongside equities, with prices for the yellow metal settling around $1,650 an ounce for the day.

The Bank of Canada announced its interest rate decision on Tuesday as well, which makes the CurrencyShares Canadian Dollar Trust (FXC) our ETF to watch. Analysts were expecting the rate to remain unchanged at 1%, although investors will likely pay more attention to the forward-looking economic commentary released after the interest rate decision itself.

See related: Central Banking 101 for Forex Traders

Chart Analysis

Since topping out at $105.59 a share on July 27, 2011, the Canadian dollar, as represented by FXC, has come under serious downward pressure.

FXC appears to have established support somewhere around the $94 level, and this ETF is up close to 5% since bottoming out at $93.29 a share on October 4, 2011.

The fund managed to end last week higher, closing above its previous resistance at the $98 level. FXC appears to be headed higher as long as news out of Europe doesn’t spook investors, potentially forcing them to jump ship from the loonie and flee to the “safer” US dollar.

chart
Click to Enlarge

FXC struggled for all of last week to hold onto the $98 level, and the fund’s ability to close above this level of resistance for two consecutive days in a row is by all means a bullish indicator.

Investors looking to get long at current levels ought to consider waiting until this ETF is back above $100 share or its 200-day moving average (yellow line), depending on individual risk preference.

Short-Term Outlook

If the Bank of Canada releases bullish commentary regarding the nation’s economic outlook following the interest rate decision, then FXC could very well trek higher as traders scramble to buy up the Canadian dollar in the currency market (try a Free ETF Screener).

In terms of upside, FXC can easily rally towards, and perhaps past, the $100 level, at which point we would advise conservative short-term traders to consider taking profits, given that this is a fairly significant resistance level.

In terms of downside, we advise investors to consider exiting this long position if shares close below the $98 level, with the next level of support coming in at $96, followed by $94 a share. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit-taking techniques.

By Stoyan Bojinov of ETFdb.com

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