The death knell for Canadian bulls?

After several years of practically one-way bullish trade for the Canadian dollar, many traders are saying 2006 may have marked the end of the mega-rally, which took the currency to an 18-year high vs. the U.S. dollar in May 2006.

Ironically, this has occurred around the same time the U.S. buck suffered a sharp downturn vs. most major currencies (see “Dollar breakdown: Solid signal or red herring?” Currency Trader, December 2006). However, a retreat in global energy prices and weakening Canadian exports have contributed to a declining Canadian dollar in recent months. Some say the bullish party is over for the currency, and traders should expect it to continue grinding lower in 2007.

A longer-term look at U.S. dollar/Canadian dollar (USD/CAD) action shows the pair falling from the $1.6100 area in January 2002 to $1.0950 in May 2006. According to David Powell, currency analyst at Ideaglobal, since last spring the Canadian dollar has sold off considerably in large part because of sentiment turning against it.

Dollar/Canada has broken a long-term downtrend line on the weekly chart and has started a new pattern of higher highs and higher lows into year-end 2006, pushing to just shy of $1.1600 in late December.

“The days of glory are now passed,” says Charmaine Buskas, economist at Moody’s Economy.com. “The rally is clearly over.”