The most crowded trade of 2015 – long USD – has burnt holes in many pockets over the last six months. Although weaker US data helped, the circa 8% fall in the US Dollar index is at least partly attributable to the one-way positioning of the market. However, the USD Index chart is bumping the downtrend – and USD/CAD may be leading.

CAD is my preferred pair to play the USD for two reasons – co-location and commodity exposure. The interrelated nature of US / Canadian trade offers some protection against macro shocks, but it’s the proximity of West Texas crude to heavy resistance between $48 and $50 that makes the commodity driven CAD attractive as a short. My view is that oil is more likely to move back below $40 (towards the middle of the newly established trading range) than make any substantial gains. This would weigh on CAD.

To save 1000 words:

20160513 usdcad

There is no doubt the downtrend is broken, whichever way the trend line is drawn. The question remains, is there a new uptrend forming? A break above the recent high at 1.3015 would give strong support to that idea.

This is one for my swing trading account. I place a stop entry order to buy at 1.3035, with a stop loss at 1.2890. My target is the 61.8% retracement level at 1.3840, although if the Fed makes a surprise move in June, or oil tanks, I may consider targeting the full retracement to 1.4695.