Looking ahead

Some analysts say risks exist for a correction or at least a slowdown in the bull trend. David Solin, partner at FX Analytics, notes since January 2002 “USD/CAD has come from the $1.60s to $1.24 in the space of two years.” Can the trend continue? “Not at this pace,” warns Solin. “We are getting very long in the tooth.”

Analysts agree that, at a minimum, there is room for a healthy correction in USD/CAD. Overall, the decline in USD/CAD has been very orderly in recent months and price has retreated within a well-defined downtrend channel on the daily chart. “At some point, we will need a little bit of a shakeout and a dollar rally,” says Coleman.

Traders should anticipate bearish risks such as a sharp pullback in crude oil prices, which could spark a retreat in the Canadian dollar, or an overall shift in bearish U.S. dollar sentiment. Also, there is that high number of speculative traders holding long positions. COT data is typically used in a contrarian fashion, with individual speculators representing the leastinformed and most underfinanced sector
of the trading community. As such, they are prone to rush in at highs and sell at lows. The fact that most of them are long now is an argument in favor of a correction.

Nonetheless, barring any major unexpected events, such as a terrorist attack or a radical shift in Bank of Canada monetary policy, “we are still in a ‘sell the rallies’ mode for USD/CAD,” says Coleman. Traders could look to monitor action within that downtrend channel and “lighten up as we near the bottom of the channel and take advantage of corrections to re-establish shorts.”

Solin agrees forex traders would be best served by shifting to a range-trading strategy as he expected “range-y” market conditions ahead.