Canadian Dollar SIA Forex Comparative Performance & Russell 2000 Index (RLS.I)

The old seasonal saying “Sell In May and Go Away” appears to be increasingly taking hold the farther we move into the month. Trading over the last few days has seen US equity indices take turns stumbling with the NASDAQ Composite (NASD.I) and the Russell 2000 (RLS.I) come under particular pressure, suggesting that investors are becoming more cautious and dialing back previously aggressive stances in the growth, momentum and small-cap plays which dominate those two indices.

The VIX Volatility Index has also started to creep upward, moving back above 20.00 for the first time since March, a sign that of investor confidence eroding and fear starting to increase. Factors influencing this change in sentiment include possible investor exhaustion after a year of strong market gains, growing inflation pressures pushing up traded interest rates such as the US 10-year treasury note yield, and corporate news flow slowing as we near the end of quarterly earnings season.

Meanwhile, signs that the latest wave of COVID may have peaked continue to emerge and with the vaccine rollout continuing, anticipation of wider economic reopening's heading into the summer continue to underpin expectations that demand for resources may continue to increase as the year progresses. Commodities and related resource stocks have been the prime beneficiaries of reopening speculation. Over the last week a wide variety of contracts from the grains, livestock, metals, and soft commodity groups have posted strong gains including copper, silver, soybeans, cattle, sugar and coffee, all helping to suggest increasing inflation pressures.

Changing sentiment and expectations can be clearly seen in this week’s changes in the SIA Charts Asset Class Rankings. Commodities has jumped up to 1st place, resource-sensitive CAD Equity is steady in 2nd place, while US and International Equity have dropped down in the rankings.

For the coming week, the spotlight now turns to the US consumer economy and US retail sales which are due on Friday morning, followed next week by earnings reports from major US retailers including Walmart, Target, Macys, Home Depot and Lowes.

In this issue of Equity Leaders Weekly, we look at recent broad-based strength in the Canadian Dollar and at the implications of a breakdown in the Russell 2000.

In the April 29th edition of the Equity Leaders Weekly, we noted the increasing outperformance of the Canadian Dollar relative to the US Dollar. This week, we take this a step further to show how the Canadian Dollar has outperformed every other major currency over the last month.

In the Markets – Forex Section of SIA Charts, you can create a comparative performance chart by determining which base currency to use (USD is the default) at the top left of the page and then scrolling down. The performance chart shows that while CAD has had its strongest performance against USD, it also has gained over 2% in the last month against the Japanese Yen (JPY) and gains of 1% against the Euro (EUR) and the Swiss Franc (CHF). It’s weakest, but still positive performance has been against the British Pound (GBP) which has benefitted from the UK outlining its reopening strategy and taking first steps.

One of the main forces driving the Loonie’s broad-based rally has been its sensitivity to rising commodity prices being a currency of a resource-exporting country. One of the most interesting features of this chart is that CAD has also gained ground on the Australian Dollar, another resource currency. This action suggests that the Canadian Dollar is also catching a tailwind from the Bank of Canada’s recent decision to reduce asset purchases, a relatively hawkish stance compared with the ultra-dovish positions of other major central banks. Interestingly, the only other central bank who has even had hawkish leanings has been the Bank of England, which may also be a factor in the smaller CAD gains against GBP relative to other currencies.All else being equal, a rising Loonie also helps to increase the relative valuation of Canadian Equities compared with US equities which has manifested itself in the Asset Class Rankings changes this week.

The Russell 2000 Index (RLS.I), which represents a basket of small-cap US stocks, is commonly used as a measure of investor appetite for risk through their willingness to invest in smaller companies. Recent action RLS.I provides an indication of how upward momentum for US equities has slowed over the last few months and investor sentiment has changed.

Climbing up out of the March 2020 lows, RLS.I initially lagged behind some of its peers like the NASDAQ Composite and the large-cap S&P 100, but its recovery trend accelerated between November and February when it broke out and made a series of new all-time highs. The first sign of trouble came back in March with a bearish Double Bottom signal but this initial selloff was contained by support near 2,090. An initial rebound peaked at a lower high near 2,330, suggesting bullish interest was faltering and this month, RLS.I has gone into another downswing completing another Bearish Double Bottom. With a bearish SMAX score of 4, RLS.I is exhibiting weakness against the asset classes.

At the moment, RLS.I appears to have shifted from an uptrend into a sideways trend with a 2,090 to 2,330 trading range emerging. Initial bounce resistance appears near 2,265 based on a 3-box reversal. A breakdown below 2,090 would complete a bearish spread triple bottom pattern and signal the start of new downtrend. Should that occur, next potential support may appear near the 2,000 round number, then 1,930 where a previous column low and a horizontal count converge.