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The Loonie in the Penalty Box

The Canadian dollar ETF plunges, and a move higher could create an entry for shorts.
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The Bank of Canada made no change to its key interest rate this morning, and that is exactly as the markets expected. What we didn't anticipate was the central bank's change in tone toward interest rates going forward, one which resulted in a sudden plunge in the Canadian dollar. What does this mean for the currency going forward, and how can we profit from it?

The maintenance of the 1% target rate came as no surprise, but the central bank cut growth expectations for 2013 down to 2% from 2.3%. Mark Carney, the outgoing head of the Bank of Canada (and incoming chief of the Bank of England), surprised markets when he deviated from his previously hawkish stance because of softening growth and tepid inflation.

The resulting plunge of the Canadian dollar creates an interesting technical scenario. In the short term, Canadian dollar bears are sitting on a nice intraday gain. In the longer run, the change in fundamental tone could assert itself in the currency's technicals and initiate a trend.

The CurrencyShares Canadian Dollar ETF (FXC) is diving below its 200-day moving average (red) for the first time since Nov. 19, filling a gap from that day. It has already broken support from late December (shaded). According to the relative strength indicator, FXC isn't quite oversold, but it's getting very close to that point with a reading of 33.43.

FXC Daily

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Here's a look at the intraday chart, to give you a clearer view of the ferocity of this move. In the five-minute time frame, it becomes clear that the big figure 100 acted as support earlier. That would provide an interesting point to sell if the price rebounds to that level. If you're playing FXC long for a quick rebound, that's your exit point. I lean toward the short side, because that's the prevailing trend.

FXC, Five-Minute

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All of the above activity is occurring on high volume. Because the currency markets are so vast, there is no way to count all of the actual volume -- it would be similar to counting grains of sand on a beach. There is also the question of when such a count should begin or end, as there is no opening or closing bell in the currency market.

However, the FXC conforms to U.S. market hours and does provide accurate volume information within that time frame. The daily snapshot reflects the volume in the early part of today's session, compared with previous full-day sessions. This move is occurring on heavier than average volume, both for this time of day and for the day when taken as a whole, and that is one reason to believe the move could be sustainable.

Would I short FXC right here and now? No way -- the damage is already done for the short term. What I'd look for is a low-volume bounce. If FXC drifts higher on light turnover in the coming days, it could provide a better entry point for shorts at the big figure. 

At the time of publication, Ponsi had no positions in securities mentioned.