The Stage Is Set for a Rip-Roaring Canadian Dollar Rally

From the Desk of Ian Culley @IanCulley

Fiat money worldwide is sidelining the dollar.

Emerging market currencies were the first to strike. Now, their developed market counterparts have joined the fray.

The result: Global equities and precious metals are catching a bid.

After a challenging second half, perhaps the year's final weeks will be a layup for stock and forex traders.

And with the Australian and New Zealand dollars completing tactical reversals against the USD, the Canadian dollar could be next…

Check out Canadian dollar futures bouncing off support:

Buyers continue to defend the 0.72 level as momentum improves and price churns below a multi-year downtrend line.

I like trading against this former support level.

Yes, it’s a bit out of character for me. I prefer to buy the strongest and sell the weakest. And I’d much rather buy strength, holding a rising asset over one that’s still contending with overhead supply.

If this best describes your approach, you can wait for a trendline violation and a breakout above 0.7550. 

I'll add to my existing position if and when a breakout occurs. Meanwhile, I'll nibble on the Canadian dollar from the long side.

Why? Broad US dollar weakness is taking hold. 

Plus, commercial net-long positioning hit a fresh three-year extreme:

Notice similar positioning has marked critical troughs in the past. The stage is set for a significant unwind in positioning that will fuel a rip-roaring rally. 

Price can continue to fall, of course. And commercials can add to their already stretched long position.

But I want nothing to do with the Canadian dollar below 0.72. That’s our line in the sand. As long as it trades above that level, we can aim for the 2021 highs at approximately .8325.

And, if the Canadian dollar is a catching bid, what's in store for gasoline futures and the broader energy space?

Spoiler alert: It’s not bearish.

Here’s an overlay chart of the Canadian dollar and gasoline futures:

Gasoline could print fresh lows in the coming weeks or months. But I don't want to make the bet that these two charts diverge over longer time frames.

It’s easy to lose sight of energy as rates roll over, metals assume leadership, and the disinflation buzz grows louder.

The Canadian dollar reminds us not to count energy out – at least not yet. 

Plus, it provides an excellent trading opportunity.

Stay tuned.

Thanks for reading.

Let me know what you think. I love hearing from you!

And be sure to download this week’s Currency Report!