NEWS / Foreign Exchange

Canadian Dollar in the Headlines (revisited)

In my letter to clients of April 2 I was noting:

'I saw a headline today on Bloomberg, 'Canadian Dollar Declines From High as Charts Indicate Currency Overbought. Canada's dollar fell from its strongest level this year as some traders speculated the currency's recent gains were overdone.' A very 'technical' headline, particularly for Bloomberg.
 
I believe the Canadian Dollar is probably not that weak. I do not perceive a sound change of market forces having already taken place in the USD/CAD - in simpler words, I do not recognize a notable low in the USD/CAD, yet.'

Around the same time I advanced a scenario of rather vague intuition - one in which the just started bearish malaise I began taking note of in the GBP/CAD could spread over the EUR/CAD, possibly affecting as well higher-yielding currencies like the Australian Dollar and the New Zealand Dollar against the Canadian Dollar.

Since April 2, the USD/CAD collapsed for about 500 pips more. The pair has nowadays been coming down closest in an year to the level at which I went long on May 31, 2006 - a day which would later be confirmed as a remarkable point of price inflection in this major US Dollar market.

That scenario of a widespread bearish malaise in the Canadian Dollar cross pairs as well has been on track during the latest weeks.

As a note of curiosity - there has been a strong visual similarity that could be noted between the USD/CAD's downleg started in early February (this year) and the EUR/USD's down movement recorded during the first half of 2005.

I don't consider such a resemblance to be all that relevant. It tells us very little about the future.
But the same similarity could point out that the best, most opportunistic from a reward/risk perspective, recent opportunity to go short the USD/CAD actually emerged in early March at around 1.18 seeking to confirm a '1-2-3' top reversal in the making - in the same way in which shorting the EUR/USD in mid March 2005 at about 1.34 on behalf of a similar chart pattern would have benefitted from a disproportionately high reward relative to the initial risk.