Last month, commercial hedgers extended their Canadian dollar exposure to their largest net-long historical position.
While positioning represents a condition – not a signal – we can only view the hedger's appetite for the loonie in one light…
Bullish!
Notice that extended commercial long positioning (the bright blue line in the lower pane) coincides with critical inflection points:
These market turns preceded extensive rallies in 2016, 2017, and 2020.
Before boarding the loonie’s next rip-roaring rally, price must provide a well-defined entry with a favorable risk-to-reward profile.
But the past two years of sideways action look more like a topping or bearish continuation pattern, not a bullish reversal:
The bullish argument for Canadian dollar futures doesn’t improve when we slap on a trendline and a 14-week RSI on the chart:
A four-year downtrend line and a bearish momentum regime fail to provide adequate reasoning to enter a long position.
On the other hand, momentum has improved since the 2022 low.
Plus, the US Dollar Index $DXY is challenging the upper bounds of an eighteen-month range. If the DXY doesn’t break out, it’ll likely revert lower – a bullish scenario for the Canadian dollar.
Check out the daily chart forming a potential ascending triangle below a multi-month polarity zone at approximately 0.7350:
You can play it two ways:
First, you can buy strength above 0.7366 (the September contract’s May high), targeting 0.7600.
Or, sell weakness below 0.7265 toward the 2020 lows of roughly 0.6850.
I’ll take whichever signal comes first.
These targets may seem outrageous, but so is commercial positioning for Canadian dollar futures.
Most G10 currencies are forming consolidations that could lead to rallies or selloffs. The loonie is no exception.
Perhaps the next three-month high or low will spark a sustained trend.
Either way, I’ll take a shot when the loonie breaks.
