USD/CAD Short Setup

If you’re like me and yuan to find something other than China to focus on in the markets, then the Canadian Dollar might be of interest to you. With public sentiment at all time lows and commercial hedger long positions nearing all time highs, I’ve been stalking the Canadian Dollar for a long entry. Although seasonality is neutral, I think the time has come where looking at the long side of CAD/USD (or short side of USD/CAD) makes sense for a short-term trade that has the potential turn into a much more aggressive move if certain levels are broken. (For the remainder of the post I will be referring to short USD/CAD to express a bullish stance on the Canadian Dollar.)

For the sake of cleanliness, we’re looking at a weekly line chart of USD/CAD going back roughly 12 years. After breaking out of a multi-year base in late 2013 and retesting the breakout in mid 2014, prices rallied hard up toward long-term resistance in the 1.27-1.28 area. After a few months of consolidation price broke out, but given the steepness of this accelerated trend and momentum failing to confirm these highs, I’m watching for price to confirm a false breakout above this weekly resistance level.

chartOn the daily chart we can see that breakout above 1.28 and the subsequent grind higher. After making new highs in August, which momentum failed to confirm, prices are having a difficult time holding above the July highs. Given how negative sentiment is in the Canadian dollar, I think that this false breakout above the July highs could be the catalyst for a swift move to come. If we do confirm a false breakout on the weekly, by closing below 1.27, then prices could fall to trendline support near 1.24.

chartFor entry / exit purposes, I like to look at one time-frame lower than I normally trade. On the hourly chart, we see that prices have rolled over after making new highs, while momentum is now hitting oversold conditions and staying within a bearish range. One reason I’ve been hesitant to get involved on the short side just yet is that the 200 period moving average is still sloping higher on this timeframe. In order to get a sustainable move to the downside we need to see that moving average start to roll over, which we’re beginning to see today. On this timeframe we can also clearly see two major resistance levels to use as a reference point and trade against. For me, as long as prices stay below resistance level 2 near 1.31, I think the overall thesis remains intact.

chartOne concern with this trade is the negative correlation between WTI Crude and USD/CAD on a monthly, quarterly, and yearly basis. If you’re trading USD/CAD, you’re essentially taking a stance on the direction of Oil since they trade so closely together. Although the price action of Crude itself does not seem to be pointing to any sort of bounce, the action in other related markets suggests that we may at least be due for a pause in the carnage, short term. From an intermarket analysis perspective, there are a lot of positives for Crude at the moment. First off, the Energy sector, as measured by XLE, OIH, XOP,  as well as Gasoline and Heating Oil futures, has not made new lows with WTI prices. Even USD/CAD, which is negatively correlated, has not made new highs as oil has grinded lower. This type of action in these markets were all early indicators of a bounce ahead in the past, but I guess we’ll see if that stands true this time around.

The Bottom Line: If we see the 200 period moving average on the hourly chart start to roll over, I’ll like the risk/reward on the short side against resistance level 2 near 1.31. Given the extremes in sentiment and steepness of the weekly and daily trends, I think we can see a swift move to the downside toward 1.24. I don’t think it’ll be an easy move given all the support down below, but I’m at least expecting prices to test that weekly breakout level at 1.27-1.28. My biggest concern for this trade is Crude Oil remaining as weak as it has been, but I think if you wait for the hourly chart of USD/CAD to roll over you can get a low risk entry on the short side with a nice reward potential.

As always, if you have any questions feel free to reach out and I’ll get back to you as soon as I can.