In terms of the CAD, it’s the most overbought major currency in our view and we are looking for it to have a correction to the downside and the USD to mount a short-covering rally. Our view of the fundamentals, sentiment, and key technical levels of support and resistance outlined below.
In terms of CAD, strength speculators have bought it heavily on the view the Bank of Canada will be the first major central bank to raise interest rates, the Bank recently indicated a reduction of stimulus, and finally, commodity prices have been on their biggest bull run in over 40 years. On the other side of the pair, the USD has been weak on the view that the Fed will keep interest rates on hold and provide easy financial conditions…
Is the Bullish News for the CAD Priced In?
The bullish news in our view is discounted in terms of the CAD and the bearish news is now getting priced in terms of the USD. A warning of a reversal can be seen on the COT Net Traders Positions and the fact that despite the market being heavily bearish of the USD downside volatility has slowed and its holding major monthly support.
Speculative and Smart Money Positioning COT Net Traders Positions
On the chart below we can see large speculative funds are buying the CAD heavily and selling the USD while commercial hedgers are selling the CAD and buying the USD. The report is useful due to the fact that commercials are hedgers and own the cash (so they lose no money) they will ONLY move their hedges when they feel prices have moved too far from fair value. They tend to be right at all major turning points and trend reversals and their movements warn of a USD rally.
Note: When using the COT it’s not a timing tool as we noted earlier the commercials own the cash so can’t lose any money and prices can overshoot in the short term so we need to time with technicals and use good money management.
USD/CAD Monthly Chart
We can see on the chart below that we have dropped to a big monthly support zone at 1.2050 – 1.2000 and this is the level we are looking to hold on a close basis to go long on strength with stop protection well back from support.
USD/CAD Daily Chart
On the daily chart we had a tail move down to a new daily low to test the 1.200 level but volume was light and we bounced back above 1.2050. We are trading in low volatility and if we can take out nearby resistance we would expect a rally to the upside on high volatility as the large number of speculators who are short are taken out on stop.
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