August 27, 2003 was the last trading day where USD/CAD traded above the 1.40 mark. Until now. The Canadian dollar (FXC) slipped hard and fast in overnight trading to hit 1.408 for USD/CAD at the time of writing.
Source: Board of Governors of the Federal Reserve System (US), Canada / U.S. Foreign Exchange Rate [DEXCAUS], retrieved from FRED, Federal Reserve Bank of St. Louis, January 5, 2016.
Above the 1.40 level, there remains little resistance to the historic high of 1.6 on USD/CAD.
Source: FreeStockCharts.com
A dovish Bank of Canada opened the gate leading to this latest wave of weakness for the Canadian dollar (FXC).
The on-going weakness in oil has directly driven the Canadian dollar to this weakness. The Bank of Canada greased the wheels by emphasizing its dovishness on monetary policy combined with two rate cuts in 2015. The first one was a huge surprise. Interestingly, speculators are just now clamoring to rebuild net short positions against the Canadian dollar despite the clear trend. Net short positions and open interest are not quite back to prior peaks when the Canadian dollar was stronger.
Source: Oanda’s CFTC’s Commitments of Traders
Speculators have spent most of the last three years in net bearish positions against the Canadian dollar, so it is surprising to see that multi-year weakness has not (yet?) led to new highs on short positions.
As I have indicated in past posts, I established a very small position in CurrencyShares Canadian Dollar ETF (FXC) in anticipation of an eventual return of strength for the Canadian dollar. This return looks further and further away with every fresh wave upward for USD/CAD. In the meantime, I have gone to the forex markets with periodic long positions on USD/CAD (buying dips). With USD/CAD trading through 1.40, I will add to the long-term FXC position and kick my USD/CAD trades up another notch until USD/CAD drops below 1.40 again. As an added twist, at the time of writing, I made a small bet that USD/CAD will retest the 1.40 level in the immediate term; this is also a very small hedge against on what has become a very large overall bullish bet on the U.S. dollar. I think this is my first attempted short on USD/CAD in about a year.
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